Analysis and Evaluation of Capital Structure

CHAPTER-6
ANALYSIS AND EVALUATION OF
CAPITAL STRUCTURE

6.1 INTRODUCTION
6.2 FINANCIAL STRUCTURE
6.3 CONCEPT OF CAPITAL STRUCTURE
6.4 MEANING OF CAPITAL STRUCTURE
6.5 ASSETS STRUCTURE AND CAPITAL STRUCTURE
6.6 CAPITAL STRUCTURE ANALYSIS
6.6.1 TOTAL DEBT EQUITY RATIO
6.6.2 FINANCIAL LEVERAGE RATIO
6.6.3 NET FIXED ASSETS TO NET-WORTH RATIO
6.6.4 PROPRIETARY RATIO
6.6.5 TOTAL ASSETS TO DEBT RATIO
6.6.6 INTEREST COVERAGE RATIO
6.7 CONCLUSION
6.8 REFERENCES

Chapter-6 [254]
 Analysis and Evaluation of Capital Structure

CHAPTER-6
ANALYSIS AND EVALUATION OF
CAPITAL STRUCTURE

6.1 INTRODUCTION:
This chapter covers concept of Capital structure – Analysis of Assets and Capital
structure – Analysis of Long Term and Short Term Funds – Analysis of Various Capital
Structure ratios. In the preceding chapter we have already explain that funds required by
a business enterprise can be raised wither through the ownership security. The concept of
financial structure and capital structure are also explained.

6.2 FINANCIAL STRUCTURE:

According to John and Mayor “financial structure” of a business as consisting
three elements assets, liabilities and capital The financial structure provides an insight
into the various types of sources tapped to finance the total assets employed in a business
enterprise that part of financial which represents long-term sources is known as “capital
structure.”
This term refers to make up of long –term funds as represented by the equity
share capital, preference share capital and long-term debt. To circumscribe the real area
of the term “Capital Structure.” it may be necessary to distinguish it from term “assets
structure,” the assets structure refers to make-up of total assets as represented by fixed
assets and current assets. Since the balance sheet is a detailed form of fundamental or
structure equation. It sets forth the financial structure of an enterprise. It states the nature
and amount of each of the various assets of the liabilities and of the property interest of
the owner. Stating the nature of the assets, liabilities and capital is not difficult as their
amount.
Undoubtedly, there should be a uniform capital structure, which suits the
requirements of all companies. In other words, the capital structure has to be tailored in

Chapter-6 [255]
 Analysis and Evaluation of Capital Structure

such a way so as to suit the needs of a particular company. Thus a model capital structure
is possible only for such a Group of Companies, which has similar characteristics.

6.3 CONCEPT OF CAPITAL STRUCTURE:

The use of the source of funds with fixed cost, such as debt and preference share
capital along with the owner‟s equity capital in the capital structure is described as
financial leverage or trading on equity. The also use of the term trained on equity is
derived from the fact that it is the owner‟s funds equity which is used as basis to raised
debt that is the equity that traded upon.

6.4 MEANING OF CAPITAL STRUCTURE:

According to Gerstaendberg, “capital structure refers the make upon firm‟s
capitalism” in other words Capital structure refers to the composition of long term funds
such as denture, long borrowings, preference share , equity share in the capitalization of a
company. The essence of capital structure decision is to determine the relative
proposition of equity and debt. Equity here in broader sense means owner‟s funds which
can be raised by issue of equity shares and preference share and by retained earnings.
Debts can be raised by issuing debenture or bonds by taking long term borrowings. The
capital structure decisions a significant financial decision because it affects the
shareholder‟s return and risk and consequently the market value of share.

6.5 ASSETS STRUCTURE AND CAPITAL STRUCTURE:

 ASSETS STRUCTURE:
The term “assets structure” refers to the right hand side of the balance sheet. It
represented by total capital employed in the business. It covers various fixed and current
assets with which the firm is carrying on its business activity. In other words, it refers to
makeup the total assets represented by fixed and current assets.
Assets structure has great importance in the manufacturing and basic industries
like automobile industry because these industries require large investment in fixed assets,
land, buildings and machinery and relatively less receivable and inventories.

Chapter-6 [256]
 Analysis and Evaluation of Capital Structure

 CAPITAL STRUCTURE:
The capital structure is used to represent the proportionate relationship between
the various long- term-forms of financing, such as debentures, long-term debt, Preference
capital and equity capital reserve and surplus. The term capital structure is frequently
used to indicate the long- term sources of funds employed in a business enterprise. In
other words, it can be said that it represents permanent financing of the concern. This is
usually measured by subtracting current liabilities from total assets. Thus, capital
structure, general reserve, preference share and long –term debts.

6.6 CAPITAL STRUCTURE ANALYSIS:

Structural ratios are based on the allocation of debt and equity in the financing
pattern of firm‟s assets. Capital structure of the borrower has strong implications
 Total debt equity ratio
 Financial leverage Ratio
 Net Fixed Assets to Net-Worth Ratio
 Proprietary Ratio
 Total assets to debt Ratio
 Interest coverage ratio

Chapter-6 [257]
 Analysis and Evaluation of Capital Structure

6.6.1 TOTAL DEBT EQUITY RATIO:

 Meaning :
This Ratio establishes a relationship between Total debts and
shareholders„Funds.
 Objective :
The objective of computing this ratio is to measure the relative proportion
of debt and equity in financing the assets of a firm.
 Components :
1. Total debt: its refers to take all types of debt(long and short term debt)
2. Shareholders‟ fund which means equity share, preference share, reserve etc.
 Computation and interpretations :
This ratio is computed by dividing the current assets and current liabilities.
This ratio is usually express as a pure ratio e.g. 2:1. In the form of a formula, this
ratio may be express as follows:

This ratio indicates the margin of safety to long term creditors. A long
term debt equity ratio implies the use of more equity than debt which means a
larger safety margin for creditors since owner‟s equity is treated as a margin of
safety by creditors and vice versa. Traditionally, a debt equity ratio of 2:1 is
considered t be satisfactory which means debt could be twice the equity.
Thus, an enterprise should have neither a very high nor a very low ratio; it
should have a satisfactory ratio. To judge whether the ratio is satisfactory or not, it
should be compare with its own past ratio or with the ratio of similar firm in the
same industry or with the industry average.
The Total Debt Equity Ratio of selected companies of Automobile
Industry in India is given in the Table No-[Link] as follows:

Chapter-6 [258]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link] TOTAL DEBT EQUITY RATIO

COMPANY NAME
YEAR
HMC TMC SIL LML BAL HML MSI MML ALL TML
2003-2004 0.15 0.21 0.48 2.67 0.27 4.93 0.09 1.30 0.47 0.35
2004-2005 0.14 0.28 0.41 13.40 0.30 1.22 0.07 1.66 0.75 0.61
2005-2006 0.09 0.50 0.67 -2.26 0.31 1.60 0.01 1.48 0.49 0.53
2006-2007 0.07 0.78 0.62 -1.17 0.29 1.53 0.09 1.68 0.34 0.58
2007-2008 0.04 0.81 0.94 -0.84 0.84 0.80 0.11 1.68 0.41 0.80
2008-2009 0.02 1.12 -8.24 -0.70 0.84 1.04 0.07 1.81 0.56 1.08
2009-2010 0.02 1.16 -1.71 -0.84 0.46 1.27 0.07 1.44 0.62 1.11
2010-2011 0.23 0.77 -1.69 -0.84 0.07 2.88 0.02 1.19 0.65 0.80
2011-2012 0.17 0.71 -1.45 -0.30 0.02 4.40 0.08 1.38 0.74 0.82
2012-2013 0.13 0.52 0.39 -0.25 0.01 -2.99 0.07 1.44 0.98 0.88
Average 0.11 0.69 -0.96 0.89 0.34 1.67 0.07 1.51 0.60 0.76
S.D. 0.07 0.32 2.77 4.57 0.30 2.18 0.03 0.20 0.19 0.24
C.V. 66.05 46.23 -288.41 514.62 88.01 130.68 42.58 12.96 31.36 31.72
Min 0.02 0.21 -8.24 -2.26 0.01 -2.99 0.01 1.19 0.34 0.35
Max 0.23 1.16 0.94 13.40 0.84 4.93 0.11 1.81 0.98 1.11
(Sources: Annual Reports and Accounts from 2003-2004 to 2012-2013)
GRAPH NO.[Link] TOTAL DEBT EQUITY RATIO

The above mentioned Table No-6.6.1.1and Graph No-6.6.1.1the indicated a

fluctuating trends of the Total debt Equity Ratio of selected Automobile industry in India
from 2003-04 to 2012-13.

Chapter-6 [259]
 Analysis and Evaluation of Capital Structure

1. Hero MotoCorp Ltd.:

Table No-6.6.1.1shows that the Total debt Equity Ratio the Hero MotoCorp Ltd.
during the year from 2003-2004 to 2012-2013, the highest ratio was 0.23 times in the
year of 2010-11 and lowest ratio was 0.02 times in the year of 2008-09 and 2009-10.
In the year 2003-04 the ratio was 0.15 times which has been decreased 0.14 times
in the year 2004-05, further it has been decreased up to 0.09 and 0.07 times in the year of
2006-08 respectively. During the year of 2010-11, it increased up to 0.23 times. It got
fluctuated the ratios have been 0.04, 0.02, 0.02, 0.17 and 0.13 times during the year of
2007-10 and 2011-2013 respectively. It has been also shown in the Graph No-[Link].
So, The Average Total debt Equity Ratio is 0.11 times, The Standard Deviation is
0.07 and The Co-efficient variance is 66.05% which shows solvency of this company
because the average Total debt Equity Ratio shows satisfactory Ratio of during the study
period.

2. TVS Motor Company :

Table No-6.6.1.1shows that the Total debt Equity Ratio of the TVS Motor
Company during the year from 2003-2004 to 2012-2013, the highest ratio was 1.16 times
in the year 2009-10 and the lowest ratio was 0.21times in the year 2003-04.
In the year 2003-04 the ratio was 0.21 times which has been increased 0.28 times
in 2004-05, further it has been increased up to 0.50, 0.78 and 0.81 times in the year of
2005-08 respectively. During the year of 2009-10, it increased up to 1.16 times. It got
fluctuated the ratios have been 1.12, 0.77, 0.71 and 0.52 times during the year of 2008-09
and 2010-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Total debt Equity Ratio is 0.69 times, The Standard Deviation is
0.32 and The Co-efficient variance is 46.23% which shows solvency of this company
because the average Total debt Equity Ratio shows satisfactory Ratio of during the study
period.

3. Scooters India Limited:

Table No-6.6.1.1shows that the Total debt Equity Ratio of the Scooters India
Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 0.94 times
Chapter-6 [260]
 Analysis and Evaluation of Capital Structure

in the year 2007-08 and the lowest ratio was -8.24 times in the year 2008-09.
In the year 2003-04 the ratio was 0.48 times which has been decreased 0.41times
in 2004-05, further it has been increased up to 0.67 times in the year of 2005-06. During
the year of 2007-08, it increased up to 0.94 times. It got fluctuated the ratios have been
0.62, -8.24, -1.71, -1.69, -1.45 and 0.39 times during the year of 2006-07 and 2008-13
respectively. It has been also shown in the Graph No -[Link].
So, The Average Total debt Equity Ratio is -0.96 times , The Standard Deviation
is 2.77 and The Co-efficient variance is -288.41% which shows solvency of this company
because the average Total debt Equity Ratio shows dissatisfactory Ratio of during the
study period.

4. LML :
Table No-6.6.1.1shows that the Total debt Equity Ratio of the LML during the
year from 2003-2004 to 2012-2013, the highest ratio was 13.40 times in the year 2004-
05 and the lowest ratio was -2.26 times in the year 2005-06.
In the year 2003-04 the ratio was 2.67 times which has been increased 13.40 times
in the year 2004-05, further it has been decreased up to -2.26 times in the year of 2005-
06. During the year of 2012-13, it increased up to -0.25 times. It got fluctuated the ratios
have been -1.17, -0.84, -0.70, -0.84, -0.84 and -0.30 times during the year of 2006--12
respectively. It has been also shown in the Graph No -[Link].
So, The Average Total debt Equity Ratio is 0.89 times, The Standard Deviation is
4.57 and The Co-efficient variance is 514.62% which shows solvency of this company
because the average Total debt Equity Ratio shows satisfactory Ratio of during the study
period.

5. Bajaj Auto Ltd. :

Table No-6.6.1.1shows that the Total debt Equity Ratio of the Bajaj Auto Ltd
during the year from 2003-2004 to 2012-2013, the highest ratio was 0.84 times in the
year 2007-08, 2008-09 and the lowest ratio was 0.01 times in the year 2012-13.
In the year 2003-04 the ratio was 0.27 times which has been increased 0.30 times
in the year 2004-05, further it has been increased up to 0.31 times in the year of 2005-06.
Chapter-6 [261]
 Analysis and Evaluation of Capital Structure

During the year of 2007-09,it increased up to 0.84 times. It got fluctuated the ratios have
been 0.29, 0.46, 0.07, 0.02 and 0.01 times during the year of 2006-07 and 2009-13
respectively. It has been also shown in the Graph No -[Link].
So, The Average Total debt Equity Ratio 0.34 times, The Standard Deviation is
0.30 and The Co-efficient variance is 88.01% which shows solvency of this company
because the average Total debt Equity Ratio shows satisfactory Ratio of during the study
period.

6. Hindustan Motors Limited :

Table No-6.6.1.1shows that the Total debt Equity Ratio of the Hindustan Motors
Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 4.93 times
in the year 2003-04 and the lowest ratio was -2.99 times in the year 2012-13.
In the year 2003-04 the ratio was 4.93 times which has been decreased 1.22 times
in the year 2004-05, further it has been increased up to 1.60 times during the year of
2005-06. During the year of 2012-13, it decreased up to -2.99 times. It got fluctuated the
ratios have been 1.53, 0.80, 1.04, 1.27, 2.88 and 4.40 times during the year of 2006-2012
respectively. It has been also shown in the Graph No -[Link].
So, The Average Total debt Equity Ratio 1.67 times, The Standard Deviation is
2.18 and The Co-efficient variance is 130.68% which shows solvency of this company
because the average Total debt Equity Ratio shows satisfactory Ratio of during the study
period.

7. Maruti Suzuki India Limited :

Table No-6.6.1.1shows that the Total debt Equity Ratio of the Maruti Suzuki
India Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 0.11
times in the year 2007-08 and the lowest ratio was 0.01 times in the year 2005-06.
In the year 2003-04 the ratio was 0.09 times which has been decreased 0.07 times
in the year 2004-05, further it has been decreased up to 0.01 times during the year of
2005-06. During the year of 2007-08, it increased up to 0.11 times. It got fluctuated the
ratios have been 0.09, 0.07, 0.07, 0.02, 0.08 and 0.07 times during the year of2006-07
and 2008-2013 respectively. It has been also shown in the Graph No -[Link].
Chapter-6 [262]
 Analysis and Evaluation of Capital Structure

So, The Average Total debt Equity Ratio 0.07 times, The Standard Deviation is
0.03 and The Co-efficient variance is 42.58 % which shows solvency of this company
because the average Total debt Equity Ratio shows satisfactory Ratio of during the study
period.

8. Mahindra and Mahindra Limited :

Table No-6.6.1.1shows that the Total debt Equity Ratio of the Mahindra and
Mahindra Limited during the year from 2003-2004 to 2012-2013, the highest ratio was
1.81 times in the year 2008-09 and the lowest ratio was 1.19 times in the year 2010-11.
In the year 2003-04 the ratio was 1.30 times which has been increased 1.66 times
in the year 2004-05, further it has been decreased up to 1.48 times during the year of
2005-06. During the year of 2008-09, it increased up to 1.81 times. It got fluctuated the
ratios have been 1.68, 1.68, 1.44, 1.19, 1.38 and 1.44 during the year of 2006-08 and
2009-13respectively. It has been also shown in the Graph No -[Link].
So, The Average Total debt Equity Ratio 1.51 times, The Standard Deviation is
0.20 and The Co-efficient variance is 12.96% which shows solvency of this company
because the average Total debt Equity Ratio shows satisfactory Ratio of during the study
period.

9. Ashok Leyland :
Table No. -6.6.1.1shows that the Total debt Equity Ratio of the Ashok Leyland
during the year from 2003-2004 to 2012-2013, the highest ratio was 0.98 times in the
year 2012-13 and the lowest ratio was 0.34 times in the year 2006-07.
In the year 2003-04 the ratio was 0.47 times which has been increased 0.75 times
in the year 2004-05, further it has been decreased up to 0.49 and 0.34 times in the year of
2005-07respectively. During the year of 2012-13, it increased up to 0.98 times. It got
fluctuated and the ratios were 0.41, 0.56, 0.62, 0.65 and 0.74 during the year of 2007-12
respectively. It has been also shown in the Graph No -[Link].

Chapter-6 [263]
 Analysis and Evaluation of Capital Structure

So, The Average Total debt Equity Ratio 0.60 times, The Standard Deviation is
0.19 and The Co-efficient variance is 31.36% which shows solvency of this company
because the average Total debt Equity Ratio shows satisfactory Ratio of during the study
period.

10. Tata Motors Limited :

Table No-6.6.1.1shows that the Total debt Equity Ratio of the Tata Motors
Limited during the year from 2003-2004 to 2012-13, the highest ratio was 1.11 times in
the year 2009-10 and the lowest ratio was 0.35 times in the year 2003-04.
In the year 2003-04 the ratio was 0.35 times which has been increased 0.61 times
in the year 2004-05, further it has been decreased up to 0.53 times in the year of 2005-06.
It got fluctuated the ratios were 0.58, 0.80, 1.08, 0.80, 0.82 and 0.88 times during the year
of 2006-09 and 2010-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Total debt Equity Ratio 0.76 times, The Standard Deviation is
0.24 and The Co-efficient variance is 31.72% which shows solvency of this company
because the average Total debt Equity Ratio shows satisfactory Ratio of during the study
period.

 ANOVA TEST OF TOTAL DEBT EQUITY RATIO :

Hypothesis:

 Ho: Null Hypothesis:

There is no significant difference in Total debt Equity Ratio of
automobile industry under study.
 H1: Alternative Hypothesis:
There is significant difference in Total debt Equity Ratio of
automobile industry under study.
 Level of Significance: 5%

Chapter-6 [264]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link]
TOTAL DEBT EQUITY RATIO
ONE WAY ANOVA TEST

Source of Sum of Degrees of Mean F

F-Value P-value
Variation Square Freedom Square critical
Between
Groups 29.95 9 3.33 0.92542 0.507174 1.985595

Within
Groups 323.69 90 3.60

Total 353.65 99

 Degree of freedom = 100-1= 99

 Table Value of „F‟ =1.98
 Calculate Value of „F‟ = 0.92542

Fcal < Ftab

0.93 < 1.98
Fcal < Ftab

Table No. [Link] indicates the calculate value of „F‟ is 0.92542 and the table
value of „F‟ at 5% levels of significance is 1.98. So, the calculate value „F‟ which is less
than the table value. It indicates that the Null Hypothesis is accepted and Alternate
Hypothesis is rejected. So, it indicates that there is no significant difference in Total Debt
Equity Ratio of selected automobile industry under study for the period.

Chapter-6 [265]
 Analysis and Evaluation of Capital Structure

6.6.2 FINANCIAL LEVERAGE RATIO:

 Meaning :
This Ratio establishes a relationship between Earning before interest and
tax and Earnings before tax.
 Objective :
The objective of computing this ratio is to measure the ability of an
organization to increase its owner‟s profit by using debt capital.
 Components :
1. EBIT=Earnings before interest and tax.
2. EBT= Earnings before tax.
 Computation and interpretations :
This ratio is computed by dividing Earnings before interest and tax and
Earnings before tax. This ratio is usually express as a pure ratio e.g. 2:1. In the
form of a formula, this ratio may be express as follows:

This ratio indicates the firm‟s ability to use fixed financial charge to
magnify the effect of changes in Earnings before interest tax on the firm‟s
Earning per share. The EBIT is calculated by adding back the interest and taxes to
the amount of net profit. Financial leverage ratio is neither a very high leverage
nor a very low leverage represents a sound picture.
An enterprise should have neither a very high nor a very low ratio; it
should have a satisfactory ratio. To judge whether the ratio is satisfactory or not, it
should be compare with its own past ratio or with the ratio of similar firm in the
same industry or with the industry average.
The Financial Leverage Ratio of selected companies of Automobile
Industry in India is given in the Table No-[Link] as follows:

Chapter-6 [266]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link] FINANCIAL LEVERAGE RATIO

COMPANY NAME
YEAR
HMC TMC SIL LML BAL HML MSI MML ALL TML
2003-2004 1.00 1.05 1.21 0.86 1.00 0.45 1.06 1.35 1.21 1.16
2004-2005 1.00 1.04 1.95 0.85 1.00 1.47 1.03 1.18 1.09 1.13
2005-2006 1.00 1.12 1.93 0.84 1.00 0.76 1.01 1.16 1.09 1.14
2006-2007 1.00 1.39 0.85 0.66 1.00 2.31 1.02 1.19 1.05 1.14
2007-2008 1.00 1.32 0.82 0.60 1.00 1.44 1.02 1.29 1.12 1.17
2008-2009 1.00 3.08 0.88 0.50 1.02 0.71 1.03 1.38 1.77 1.80
2009-2010 1.00 1.99 0.80 0.55 1.00 0.67 1.01 1.28 1.19 1.44
2010-2011 1.01 1.29 0.38 0.55 1.00 -6.84 1.01 1.25 1.24 1.63
2011-2012 1.01 1.18 0.22 0.24 1.01 0.39 1.03 1.43 1.37 1.91
2012-2013 1.00 1.29 0.67 0.44 1.00 0.61 1.06 1.41 1.80 8.93
Average 1.00 1.48 0.97 0.61 1.00 0.20 1.03 1.29 1.29 2.15
S.D. 0.002 0.62 0.58 0.20 0.01 2.54 0.02 0.10 0.28 2.40
C.V. 0.24 42.32 59.75 32.97 0.66 1290.67 1.84 7.61 21.39 112.04
Min 1.00 1.04 0.22 0.24 1.00 -6.84 1.01 1.16 1.05 1.13
Max 1.01 3.08 1.95 0.86 1.02 2.31 1.06 1.43 1.80 8.93
(Sources: Annual Reports and Accounts from 2003-2004 to 2012-2013)
GRAPH NO.[Link] FINANCIAL LEVERAGE RATIO

The above mentioned Table No-[Link] and Graph No-[Link] the indicated a
fluctuating trends of the Financial Leverage Ratio of selected Automobile industry in
India from 2003-04 to 2012-13.

Chapter-6 [267]
 Analysis and Evaluation of Capital Structure

1. Hero MotoCorp Ltd. :

Table No-[Link] shows that the Financial Leverage Ratio of the Hero MotoCorp
Ltd during the year from 2003-2004 to 2012-2013, the highest ratio was 1.01times in the
year of 2010-11, 2011-12 and lowest ratio was 1.00 times in the year of 2003-10,
2012-13.
In the year 2003-04 the ratio was 1.00 times which has been also 1.00 times in
2004-05. During the year of 2010-12, it increased up to 1.01 times. It got same the ratios
have been 1.00 times during the year of 2005-10 and 2012-13 respectively. It has been
also shown in the Graph No-[Link].
So, the Average Financial Leverage Ratio is 1.00 times, The Standard Deviation
is 0.002 and The Co-efficient variance is 0.24% which shows solvency of this company
because the average Financial Leverage Ratio shows satisfactory Ratio of during the
study period.

2. TVS Motor Company:

Table No -[Link] shows that the Financial Leverage Ratio of the TVS Motor
Company during the year from 2003-2004 to 2012-2013, the highest ratio was 3.08 times
in the year 2008-09 and the lowest ratio was 1.04 times in the year 2004-05.
In the year 2003-04 the ratio was 1.05 times which has been decreased 1.04 times
in the year 2004-05, further it has been increased up to 1.12 and 1.39 times in the year of
2005-07 respectively. During the year of 2008-09, it increased up to 3.08 times. It got
fluctuated and the ratios have been 1.32, 1.99, 1.29, 1.18 and 1.29 times during the year
of 2007-08 and 2009-13 respectively. It has been also shown in the Graph No-[Link].
So, the Average Financial Leverage Ratio is 1.48 times The Standard Deviation is
0.62 and The Co-efficient variance is 42.32 % which shows solvency of this company
because the average Financial Leverage Ratio shows satisfactory Ratio of during the
study period.

3. Scooters India Limited:

Table No -[Link] shows that the Financial Leverage Ratio of the Scooters India
Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 1.95 times
Chapter-6 [268]
 Analysis and Evaluation of Capital Structure

in the year 2004-05 and the lowest ratio was 0.22 times in the year 2011-12.
In the year 2003-04 the ratio was 1.21 times which has been increased 1.95 times
in the year 2004-05, further it has been decreased up to 1.93, 0.85 and 0.82 times in the
year of 2005-08 respectively. During the year of 2011-12, it decreased up to 0.22 times.
It got fluctuated and the ratios have been 0.82, 0.80, 0.38 and 0.67 times during the year
of 2007-11 and 2012-13 respectively. It has been also shown in the Graph No-[Link].
So, The Average Financial Leverage Ratio is 0.97 times, The Standard Deviation
is 0.58 and The Co-efficient variance is 59.75 % which shows solvency of this company
because the average Financial Leverage Ratio shows dissatisfactory Ratio of during the
study period.

4. LML :
Table No -[Link] shows that the Financial Leverage Ratio of the LML during the
year from 2003-2004 to 2012-2013, the highest ratio was 0.86 times in the year 2003-04
and the lowest ratio was 0.24 times in the year 2011-12.
In the year 2003-04 the ratio was 0.86 times which has been decreased 0.85 times
in the year 2004-05, further it has been decreased up to 0.84, 0.66 and 0.60 times in the
year of 2005-08 respectively. During the year of 2011-12, it increased up to 0.24 times.
It got fluctuated and the ratios have been 0.50, 0.55, 0.55 and 0.44 times during the year
of 2008-11 and 2012-13 respectively. It has been also shown in the Graph No-[Link].
So, The Average Financial Leverage Ratio is 0.61 times, The Standard Deviation
is 0.20 and The Co-efficient variance is 32.97% which shows solvency of this company
because the average Financial Leverage Ratio shows dissatisfactory Ratio of during the
study period.

5. Bajaj Auto Ltd. :

Table No -[Link] shows that the Financial Leverage Ratio of the Bajaj Auto Ltd
during the year from 2003-2004 to 2012-2013, the highest ratio was 1.02 times in the
year 2008-09 and the lowest ratio was 1.00 times in the year 2003-08, 2009-11 and
2012-13.

Chapter-6 [269]
 Analysis and Evaluation of Capital Structure

In the year 2003-04 the ratio was 1.00 times which has been also same 1.00 times
in the year 2004-05, further it has been increased up to 1.02 times in the year of 2008-09.
During the year of 2011-12, it decreased up to 1.01 times. It got same the ratios have
been 1.00 times during the year of 2005-08, 2009-11 and 2012-13 respectively. It has
been also shown in the Graph No-[Link].
So, The Average Financial Leverage Ratio 1.00 times, The Standard Deviation is
0.01 and The Co-efficient variance is 0.66% which shows solvency of this company
because the average Financial Leverage Ratio shows satisfactory Ratio of during the
study period.

6. Hindustan Motors Limited :

Table No -[Link] shows that the Financial Leverage Ratio of the Hindustan
Motors Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 2.31
times in the year 2006-07 and the lowest ratio was -6.84 times in the year 2010-11.
In the year 2003-04 the ratio was 0.45 times which has been increased 1.47 times
in the year 2004-05, further it has been decreased up to 0.76 times during the year of
2005-06. During the year of 2006-07, it increased up to 2.31 times. It got fluctuated and
the ratios have been 1.44, 0.71, 0.67, -6.84, 0.39 and 0.61 times during the year of
2007-13 respectively. It has been also shown in the Graph No-[Link].
So, The Average Financial Leverage Ratio 0.20 times, The Standard Deviation is
2.54 and The Co-efficient variance is 1290.67% which shows solvency of this company
because the average Financial Leverage Ratio shows satisfactory Ratio of during the
study period.

7. Maruti Suzuki India Limited:

Table No -[Link] shows that the Financial Leverage Ratio of the Maruti Suzuki
India Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 1.06
times in the year 2003-04 ,2012-13 and the lowest ratio was 1.01times in the year
2005-06, 2009-11.
In the year 2003-04 the ratio was 1.06 times which has been decreased 1.03 times
in the year of 2004-05, further it has been decreased up to 1.01 times during the year of
Chapter-6 [270]
 Analysis and Evaluation of Capital Structure

2005-06. During the year of 2012-13, it increased up to 1.06 times. It got fluctuated and
the ratios have been 1.02, 1.02, 1.03, 1.01, 1.01 and 1.03 times during the year of 2006-
12 respectively. It has been also shown in the Graph No-[Link].
So, The Average Financial Leverage Ratio 1.03 times, The Standard Deviation is
0.02 and The Co-efficient variance is 1.84% which shows solvency of this company
because the average Financial Leverage Ratio shows satisfactory Ratio of during the
study period.

8. Mahindra and Mahindra Limited :

Table No -[Link] shows that the Financial Leverage Ratio of the Mahindra and
Mahindra Limited during the year from 2003-2004 to 2012-2013, the highest ratio was
1.43 times in the year 2011-12 and the lowest ratio was 1.16 times in the year 2003-04.
In the year 2003-04 the ratio was 1.35 times which has been decreased 1.18 times
in the year 2004-05, further it has been decreased up to 1.16 times during the year of
2005-06. During the year of 2011-12, it increased up to 1.43 times. It got fluctuated and
the ratios have been 1.19, 1.29, 1.38, 1.28, 1.25 and 1.14 during the year of 2006-11 and
2012-13respectively. It has been also shown in the Graph No-[Link].
So, The Average Financial Leverage Ratio 1.29 times, The Standard Deviation is
0.10 and The Co-efficient variance is 7.61% which shows solvency of this company
because the average Financial Leverage Ratio shows satisfactory Ratio of during the
study period.

9. Ashok Leyland :
Table No -[Link] shows that the Financial Leverage Ratio of the Ashok Leyland
during the year from 2003-2004 to 2012-2013, the highest ratio was 1.80 times in the
year 2012-13 and the lowest ratio was 1.05 times in the year 2006-07.
In the year 2003-04 the ratio was 1.21 times which has been decreased 1.09 times
in the year 2004-06 respectively, further it has been decreased up to 1.05 times in the year
of 2006-07. During the year of 2012-13, it increased up to 1.80 times. It got fluctuated
and the ratios were 1.12, 1.77, 1.19, 1.24 and 1.37 times during the year of 2007-12
respectively. It has been also shown in the Graph No-[Link].
Chapter-6 [271]
 Analysis and Evaluation of Capital Structure

So, The Average Financial Leverage Ratio 1.29 times, The Standard Deviation is
0.28 and The Co-efficient variance is 21.39% which shows solvency of this company
because the average Financial Leverage Ratio shows satisfactory Ratio of during the
study period.

10. Tata Motors Limited :

Table No -[Link] shows that the Financial Leverage Ratio of the Tata Motors Ltd
during the year from 2003-2004 to 2012-13, the highest ratio was 8.93 times in the year
2012-13 and the lowest ratio was 1.13 times in the year 2004-05.
In the year 2003-04 the ratio was 1.16 times which has been decreased 1.13 times
in the year 2004-05, further it has been increased up to 1.14, 1.14, 1.17 and 1.80 times in
the year of 2005-09 respectively. During the year of 2012-13, it increased up to 8.93
times. It got fluctuated and the ratios were 1.44, 1.63 and 1.91 during the year of 2009-
2012 respectively. It has been also shown in the Graph No-[Link].
So, The Average Financial Leverage Ratio 2.15 times, The Standard Deviation is
2.40 and The Co-efficient variance is 112.04% which shows solvency of this company
because the average Financial Leverage Ratio shows satisfactory Ratio of during the
study period.

 ANOVA TEST OF FINANCIAL LEVERAGE RATIO:

Hypothesis:

 Ho: Null Hypothesis:

There is no significant difference in Financial Leverage Ratio of
automobile industry under study.
 H1: Alternative Hypothesis:
There is significant difference in Financial Leverage Ratio of
automobile industry under study.
 Level of Significance: 5%

Chapter-6 [272]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link]
FINANCIAL LEVERAGE RATIO
ONE WAY ANOVA TEST

Degrees
Source of Sum of Mean
of F-Value P-value F critical
Variation Square Square
Freedom
Between
13.18847854 9 1.4653 1.024852 0.426601 1.985595
Groups
Within
128.686645 90 1.4298
Groups

Total 141.8751236 99

 Degree of freedom = 100-1= 99

 Table Value of „F‟ =1.98
 Calculate Value of „F‟ = 1.02

Fcal < Ftab

1.02 < 1.98
Fcal < Ftab

Table No.[Link] indicates the calculate value of „F‟ is 1.024852and the table
value of „F‟ at 5% levels of significance is 1.98. So, the calculate value „F‟ which is less
than the table value. It indicates that the Null Hypothesis is accepted and Alternate
Hypothesis is rejected. So, it indicates that there is no significant difference in Financial
Leverage Ratio of selected automobile industry under study for the period.

Chapter-6 [273]
 Analysis and Evaluation of Capital Structure

6.6.3 NET FIXED ASSETS TO NET WORTH RATIO:

 Meaning :
This Ratio establishes a relationship between net fixed assets and Net
worth.
 Objective :
The objective of computing this ratio is to measure the safety margin
available for long –term creditors.
 Components :
1. Net Fixed Assets.
2. Net worth.
 Computation and interpretations :
This ratio is computed by dividing the net fixed assets by Net worth. This
ratio is usually express as a „x‟ number of times. In the form of a formula, this
ratio may be express as follows:

This ratio indicates the extent to which the owners' cash is frozen in the
form of fixed assets, such as property, plant, and equipment, and the extent to
which funds are available for the company's operations.
Fixed assets to net worth ratio 0.75 or higher is usually undesirable, as it
indicates that the firm is vulnerable to unexpected events and changes in the
business climate. But the term "fixed assets" has different interpretations so it's
difficult to use and compare this ratio.
An enterprise should have neither a very high nor a very low ratio, it
should have a satisfactory ratio. To judge whether the ratio is satisfactory or not, it
should be compare with its own past ratio or with the ratio of similar firm in the
same industry or with the industry average.
The Net Fixed Assets and Net worth Ratio of selected companies of
Automobile Industry in India is given in the Table No-[Link] as follows:

Chapter-6 [274]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link] NET FIXED ASSETS TO NET-WORTH RATIO

COMPANY NAME
YEAR
HMC TMC SIL LML BAL HML MSI MML ALL TML
2003-2004 1.15 1.21 1.48 3.67 1.15 5.93 1.09 2.42 1.47 1.35
2004-2005 1.14 1.28 1.41 14.40 1.33 2.22 1.07 2.81 1.75 1.61
2005-2006 1.09 1.50 1.67 -1.26 1.33 2.60 1.01 2.71 1.49 1.53
2006-2007 1.07 1.78 1.62 -0.17 1.31 2.53 1.09 3.02 1.34 1.58
2007-2008 1.04 1.81 1.94 0.16 1.84 1.80 1.11 3.12 1.41 1.80
2008-2009 1.02 2.12 -7.24 0.30 1.84 2.04 1.07 3.24 1.56 2.08
2009-2010 1.02 2.16 -0.71 0.16 1.46 2.27 1.07 2.68 1.62 2.11
2010-2011 1.74 1.81 -0.75 0.16 1.13 4.14 1.04 2.73 1.67 1.97
2011-2012 1.41 1.75 -0.48 0.68 1.07 5.79 1.10 2.89 1.75 1.96
2012-2013 1.19 1.56 1.45 0.73 1.04 -2.64 1.09 2.92 2.00 1.98
Average 1.19 1.70 0.04 1.88 1.35 2.67 1.07 2.85 1.61 1.80
S.D. 0.23 0.32 2.77 4.57 0.29 2.41 0.03 0.24 0.19 0.26
C.V. 19.12 18.64 7267.29 242.88 21.49 90.27 2.68 8.36 12.12 14.57
Min 1.02 1.21 -7.24 -1.26 1.04 -2.64 1.01 2.42 1.34 1.35
Max 1.74 2.16 1.94 14.40 1.84 5.93 1.11 3.24 2.00 2.11
(Sources: Annual Reports and Accounts from 2003-2004 to 2012-2013)
GRAPH NO.[Link] NET FIXED ASSETS TO NET-WORTH RATIO

The above mentioned Table No-[Link] and Graph No-[Link] the indicated a
fluctuating trends of the Net Fixed Assets to Net-Worth Ratio of selected Automobile
industry in India from 2003-04 to 2012-13.

Chapter-6 [275]
 Analysis and Evaluation of Capital Structure

1. Hero MotoCorp Ltd. :

Table No -6.6.3.1shows that the Net Fixed Assets to Net-Worth Ratio of the Hero
MotoCorp Ltd during the year from 2003-2004 to 2012-2013, the highest ratio was 1.74
times in the year of 2010-11 and lowest ratio was 1.02 times in the year of 2008-10.
In the year 2003-04 the ratio was 1.15 times which has been decreased 1.14 times
in the year 2004-05, further it has been decreased up to 1.09 1.07 and 1.04 times in the
year of 2005-08 respectively. During the year of 2008-10, it increased up to 1.02 times.
It got fluctuated and the ratios have been 1.74, 1.41 and 1.19 times during the year of
2010-2013 respectively. It has been also shown in the Graph No -[Link].
So, The Average Net Fixed Assets to Net-Worth Ratio is 1.19 times, The
Standard Deviation is 0.23 and The Co-efficient variance is 19.12% which shows
solvency of this company because the average Net Fixed Assets to Net-Worth Ratio
shows satisfactory Ratio of during the study period.
2. TVS Motor Company:
Table No -[Link] shows that the Net Fixed Assets to Net-Worth Ratio of the TVS
Motor Company during the year from 2003-2004 to 2012-2013, the highest ratio was
2.16 times in the year 2009-10 and the lowest ratio was 1.21 times in the year 2003-04.
In the year 2003-04 the ratio was 1.21 times which has been increased 1.28 times
in the year 2004-05, further it has been increased up to 1.50,1.78 and 1.81 times in the
year of 2005-08 respectively. During the year of 2008-09, it increased up to 2.16 times. It
got fluctuated and the ratios have been 2.12, 1.81, 1.75 and 1.56 times during the year of
2008-09 and 2010-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Net Fixed Assets to Net-Worth Ratio is 1.70 times, The
Standard Deviation is 0.32 and The Co-efficient variance is 18.64 % which shows
solvency of this company because the average Net Fixed Assets to Net-Worth Ratio
shows satisfactory Ratio of during the study period.
3. Scooters India Limited:
Table No -[Link] shows that the Net Fixed Assets to Net-Worth Ratio of the
Scooters India Limited during the year from 2003-2004 to 2012-2013, the highest ratio
was 1.94 times in the year 2007-08 and the lowest ratio was -7.24 times in the year
2008-09.
Chapter-6 [276]
 Analysis and Evaluation of Capital Structure

In the year 2003-04 the ratio was 1.48 times which has been decreased 1.41times
in the year 2004-05, further it has been increased up to 1.67 times in the year of 2005-06.
During the year of 2008-09, it decreased up to -7.24 times. It got fluctuated and the ratios
have been 1.94, -0.71, -0.75, -0.48 and 1.45 times during the year of 2007-08 and
2009-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Net Fixed Assets to Net-Worth Ratio is 0.04 times, The
Standard Deviation is 2.77 and The Co-efficient variance is 7267.29 % which shows
solvency of this company because the average Net Fixed Assets to Net-Worth Ratio
shows satisfactory Ratio of during the study period.
4. LML :
Table No -6.6.3.1shows that the Net Fixed Assets to Net-Worth Ratio of the LML
during the year from 2003-2004 to 2012-2013, the highest ratio was 14.40 times in the
year 2004-05 and the lowest ratio was -1.26 times in the year 2005-06.
In the year 2003-04 the ratio was 3.67 times which has been increased 14.40 times
in the year 2004-05, further it has been decreased up to -1.26 times in the year of 2005-
006. During the year of 2008-09, it increased up to 0.30 times. It got fluctuated and the
ratios have been 0.16, 0.16, 0.16, 0.68 and 0.73 times during the year of 2007-08 and
2009-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Net Fixed Assets to Net-Worth Ratio is 1.88 times, The
Standard Deviation is 4.57 and The Co-efficient variance is 242.88% which shows
solvency of this company because the average Net Fixed Assets to Net-Worth Ratio
shows satisfactory Ratio of during the study period.
5. Bajaj Auto Ltd. :
Table No -6.6.3.1shows that the Net Fixed Assets to Net-Worth Ratio of the Bajaj
Auto Ltd during the year from 2003-2004 to 2012-2013, the highest ratio was 1.84 times
in the year 2007-08, 2008-09 and the lowest ratio was 1.04 times in the year 2012-13.
In the year 2003-04 the ratio was 1.15 times which has been increased 1.33 times
in the year 2004-06, further it has been decreased up to 1.31 times in the year of 2006-07.
During the year of 2007-09, it increased up to 1.84 times. It got fluctuated and the ratios
have been 1.46, 1.13, 1.07 and 1.04 times during the year of 2009-2013 respectively. It
has been also shown in the Graph No -[Link].
Chapter-6 [277]
 Analysis and Evaluation of Capital Structure

So, The Average Net Fixed Assets to Net-Worth Ratio 1.35 times, The Standard
Deviation is 0.29 and The Co-efficient variance is 21.49% which shows solvency of this
company because the average Net Fixed Assets to Net-Worth Ratio shows satisfactory
Ratio of during the study period.
6. Hindustan Motors Limited :
Table No -6.6.3.1shows that the Net Fixed Assets to Net-Worth Ratio of the
Hindustan Motors Limited during the year from 2003-2004 to 2012-2013, the highest
ratio was 5.93 times in the year 2003-04 and the lowest ratio was -2.64 times in the year
2012-13.
In the year 2003-04 the ratio was 5.93 times which has been decreased 2.22 times
in the year 2004-05, further it has been increased up to 2.60 times during the year of
2005-06. During the year of 20012-13, it decreased up to -2.64 times. It got fluctuated
and the ratios have been 2.53, 1.80, 2.04, 2.27, 4.14 and 5.79 times during the year of
2006-12 respectively. It has been also shown in the Graph No -[Link].
So, The Average Net Fixed Assets to Net-Worth Ratio 2.67 times, The Standard
Deviation is 2.41 and The Co-efficient variance is 90.27% which shows solvency of this
company because the average Net Fixed Assets to Net-Worth Ratio shows satisfactory
Ratio of during the study period.
7. Maruti Suzuki India Limited :
Table No-6.6.3.1shows that the Net Fixed Assets to Net-Worth Ratio of the
Maruti Suzuki India Limited during the year from 2003-2004 to 2012-2013, the highest
ratio was 1.11 times in the year 2007-08 and the lowest ratio was 1.01 times in the year
2005-06.
In the year 2003-04 the ratio was 1.09 times which has been decreased 1.07 times
in the year 2004-05, further it has been decreased up to 1.01 times during the year of
2005-06. During the year of 2007-08, it increased up to 1.11 times. It got fluctuated and
the ratios have been 1.09, 1.07, 1.07, 1.04, 1.10 and 1.09 times during the year of
2006-07 and 2008-2013 respectively. It has been also shown in the Graph No -[Link].

Chapter-6 [278]
 Analysis and Evaluation of Capital Structure

So, The Average Net Fixed Assets to Net-Worth Ratio 1.07 times, The Standard
Deviation is 0.03 and The Co-efficient variance is 2.68 % which shows solvency of this
company because the average Net Fixed Assets to Net-Worth Ratio shows satisfactory
Ratio of during the study period.
8. Mahindra and Mahindra Limited :
Table No -6.6.3.1shows that the Net Fixed Assets to Net-Worth Ratio of the
Mahindra and Mahindra Ltd during the year from 2003-2004 to 2012-2013, the highest
ratio was 3.24 times in the year 2008-09 and the lowest ratio was 2.42 times in the year
2003-04.
In the year 2003-04 the ratio was 2.42 times which has been increased 2.81 times
in the year 2004-05, further it has been decreased up to 2.71 times during the year of
2005-06. During the year of 2008-09, it increased up to 3.24 times. It got fluctuated and
the ratios have been 3.02, 3.12, 2.68, 2.73, 2.89 and 2.92 times during the year of
2006-08 and 2009-13 respectively. It has been also shown in the Graph No-[Link].
So, The Average Net Fixed Assets to Net-Worth Ratio 2.85 times, The Standard
Deviation is 0.24 and The Co-efficient variance is 8.36% which shows solvency of this
company because the average Net Fixed Assets to Net-Worth Ratio shows satisfactory
Ratio of during the study period.
9. Ashok Leyland :
Table No -6.6.3.1shows that the Net Fixed Assets to Net-Worth Ratio of the
Ashok Leyland during the year from 2003-2004 to 2012-2013, the highest ratio was
2.00 times in the year 2012-13 and the lowest ratio was 1.34 times in the year 2006-07.
In the year 2003-04 the ratio was 1.47 times which has been increased 1.75 times
in the year 2004-05, further it has been decreased up to 1.49 and 1.34 times in the year of
2005-07 respectively. During the year of 2012-13, it increased up to 2.00 times. It got
fluctuated and the ratios were 1.41, 1.56, 1.62, 1.67 and 1.75 times during the year of
2007-12 respectively. It has been also shown in the Graph No -[Link].
So, The Average Net Fixed Assets to Net-Worth Ratio 1.61 times, The Standard
Deviation is 0.19 and The Co-efficient variance is 12.12% which shows solvency of this
company because the average Net Fixed Assets to Net-Worth Ratio shows satisfactory
Ratio of during the study period.
Chapter-6 [279]
 Analysis and Evaluation of Capital Structure

10. Tata Motors Limited :

Table No -6.6.3.1shows that the Net Fixed Assets to Net-Worth Ratio of the Tata
Motors Limited during the year from 2003-2004 to 2012-13, the highest ratio was 2.11
times in the year 2009-10 and the lowest ratio was 1.35 times in the year 2003-04.
In the year 2003-04 the ratio was 1.35 times which has been increased 1.61 times
in the year 2004-05, further it has been decreased up to 1.53 times in the year of 2005-06.
During the year of 2009-10, it increased up to 2.11 times. It got fluctuated and the ratios
were 1.58, 1.80, 2.08, 1.97, 1.96 and 1.98 times during the year of 2006-09 and 2010-
2013 respectively. It has been also shown in the Graph No -[Link].
So, The Average Net Fixed Assets to Net-Worth Ratio 1.80 times, The Standard
Deviation is 0.26 and The Co-efficient variance is 14.57% which shows solvency of this
company because the average Net Fixed Assets to Net-Worth Ratio shows satisfactory
Ratio of during the study period.

 ANOVA TEST OF NET FIXED ASSETS TO NET-WORTH RATIO:

Hypothesis:

 Ho: Null Hypothesis:

There is no significant difference in Net Fixed Assets to Net-Worth
Ratio of automobile industry under study.
 H1: Alternative Hypothesis:
There is significant difference in Net Fixed Assets to Net-Worth
Ratio of automobile industry under study.
 Level of Significance: 5%

Chapter-6 [280]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link]
NET FIXED ASSETS TO NET-WORTH RATIO
ONE WAY ANOVA TEST

Source Degrees
Sum of Mean F
of of F-Value P-value
Square Square critical
Variation Freedom
Between
Groups 293354.7185 9 32594.96872 0.858223 0.565278 1.985595

Within
Groups 3418163.722 90 37979.59692

Total 3711518.441 99

 Degree of freedom = 100-1= 99

 Table Value of „F‟ =1.98
 Calculate Value of „F‟ = 0.86
Fcal < Ftab
0.86 < 1.98
Fcal < Ftab

Table No6.6.3.2 table indicates the calculate value of „F‟ is 0.858223 and the
table value of „F‟ at 5% levels of significance is 1.98. So, the calculate value „F‟ which is
less than the table value. It indicates that the Null Hypothesis is accepted and Alternate
Hypothesis is rejected. So, it indicates that there is no significant difference in Net Fixed
Assets to Net-Worth Ratio of selected automobile industry under study for the period.

Chapter-6 [281]
 Analysis and Evaluation of Capital Structure

6.6.4 PROPRIETARY RATIO:

 Meaning :
This Ratio establishes a relationship between owners‟ Fund and the Total
Assets.
 Objective :
The objective of computing this ratio is to measure the proportion of the
total assets financed by the equity or proprietary‟s funds.
 Components:
1. Proprietary‟s funds or equity shareholder‟s Funds.
2. Total Assets without preliminary expenses.
 Computation and interpretations :
This ratio is computed by dividing the Proprietary‟s funds by Total Assets.
This ratio is usually express as a percentage. In the form of a formula, this ratio
may be express as follows:

This ratio indicates the extent to which the assets of the enterprise have
been financed out of proprietors‟ funds. A high proprietary ratio indicated the
larger safety margin for creditors and the enterprise is not talking the benefit of
trading on equity. A low proprietary ratio indicates the greater it‟s to creditors and
the enterprise is talking the befit of trading on equity.
An enterprise should have neither a very high nor a very low ratio; it
should have a satisfactory ratio. To judge whether the ratio is satisfactory or not, it
should be compare with its own past ratio or with the ratio of similar firm in the
same industry or with the industry average.
The proprietary Ratio of selected companies of Automobile Industry in
India is given in the Table No-[Link] as follows:

Chapter-6 [282]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link] PROPRIETARY RATIO

COMPANY NAME
YEAR
HMC TMC SIL LML BAL HML MSI MML ALL TML
2003-2004 86.70 82.85 67.34 27.26 86.84 16.88 92.01 41.27 67.83 74.02
2004-2005 88.10 78.42 70.84 6.94 75.15 45.00 93.44 35.58 57.02 62.23
2005-2006 91.54 66.55 60.03 -79.66 75.42 38.43 98.70 36.97 67.12 65.34
2006-2007 93.73 56.09 61.90 -592.86 76.51 39.46 91.57 33.11 74.74 63.15
2007-2008 95.77 55.22 51.58 636.22 54.33 55.64 90.34 32.01 70.77 55.52
2008-2009 97.98 47.21 -13.81 328.14 54.36 49.09 93.04 30.84 63.95 48.16
2009-2010 98.13 46.31 -140.06 636.22 68.63 43.97 93.51 37.27 61.67 47.42
2010-2011 57.33 55.22 -133.58 636.22 88.41 24.18 96.22 36.67 59.96 50.69
2011-2012 70.80 57.07 -206.97 148.09 93.88 17.26 91.00 34.60 57.03 51.11
2012-2013 83.71 64.04 68.88 137.00 95.82 -37.91 91.53 34.22 50.11 50.54
Average 86.38 60.90 -11.39 188.36 76.93 29.20 93.14 35.25 63.02 56.82
S.D. 13.07 12.17 107.28 389.66 14.79 27.03 2.57 3.01 7.36 8.90
C.V. 15.13 19.99 -942.21 206.88 19.22 92.58 2.76 8.53 11.69 15.66
Min 57.33 46.31 -206.97 -592.86 54.33 -37.91 90.34 30.84 50.11 47.42
Max 98.13 82.85 70.84 636.22 95.82 55.64 98.70 41.27 74.74 74.02
(Sources: Annual Reports and Accounts from 2003-2004 to 2012-2013)
GRAPH NO.[Link] PROPRIETARY RATIO

The above mentioned Table No-[Link] and Graph No-[Link] the indicated a
fluctuating trends of the Proprietary Ratio of selected Automobile industry in India from
2003-04 to 2012-13.

Chapter-6 [283]
 Analysis and Evaluation of Capital Structure

1. Hero MotoCorp Ltd :

Table No -[Link] shows that the Proprietary Ratio of the Hero MotoCorp Ltd
during the year from 2003-2004 to 2012-2013, the highest ratio was 98.13% in the year
of 2009-10 and lowest ratio was 57.33% in the year of 2010-11.
In the year 2003-04 the ratio was 86.70% which has been increased 88.10% in
2004-05, further it has been increased up to 91.54, 93.73 and 95.77 percent in the year of
2005-08 respectively. During the year of 2009-10, it increased up to 98.13%. It got
fluctuated and the ratios have been 97.98, 57.33, 70.80 and 83.71 percent during the year
of 2008-09 and 2010-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Proprietary Ratio is 86.38%, The Standard Deviation is 13.07
and The Co-efficient variance is 15.13% which shows solvency of this company because
the average Proprietary Ratio shows satisfactory Ratio of during the study period.

2. TVS Motor Company :

Table No -[Link] shows that the Proprietary Ratio of the TVS Motor Company
during the year from 2003-2004 to 2012-2013, the highest ratio was 82.85% in the year
2003-04 and the lowest ratio was 46.31% in the year 2009-10.
In the year 2003-04 the ratio was 82.85% which has been decreased 78.42% in
2004-05, further it has been increased up to66.55% in the year 2005-06. During the year
of 2009-10, it increased up to 46.31%. It got fluctuated and the ratios have been 56.09,
55.22, 47.21, 55.22, 57.07 and 64.04 percent during the year of 2006-09 and 2010-13
respectively. It has been also shown in the Graph No -[Link].
So, the Average Proprietary Ratio is 60.90 %, The Standard Deviation is 12.17
and The Co-efficient variance is 19.99 % which shows solvency of this company because
the average Proprietary Ratio shows satisfactory Ratio of during the study period.

3. Scooters India Limited:

Table No -6.6.4.1shows that the Proprietary Ratio of the Scooters India Limited
during the year from 2003-2004 to 2012-2013, the highest ratio was 70.84% in the year
2004-05 and the lowest ratio was -206.97% in the year 2011-12.

Chapter-6 [284]
 Analysis and Evaluation of Capital Structure

In the year 2003-04 the ratio was 67.34% which has been increased 70.84% in
2004-05, further it has been decreased up to 60.03% in the year of 2005-06. During the
year of 2011-12, it decreased up to -206.97%. It got fluctuated and the ratios have been
61.90, 51.58, -13.81, -140.06, -133.58, and 68.88 percent during the year of 2006-11 and
2012-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Proprietary Ratio is -11.39 %, The Standard Deviation is 107.28
and The Co-efficient variance is -942.21 % which shows solvency of this company
because the average Proprietary Ratio shows dissatisfactory Ratio of during the study
period.

4. LML :
Table No -6.6.4.1shows that the Proprietary Ratio of the LML during the year
from 2003-2004 to 2012-2013, the highest ratio was 636.22% in the year 2007-08 and
the lowest ratio was -592.86% in the year 2006-07.
In the year 2003-04 the ratio was 27.26% which has been decreased 6.94% in the
year 2004-05, further it has been decreased up to -79.66 and -592.86 percent in the year
of 2005-07 respectively. During the year of 2007-08 and 2009-11respectively, it
increased up to 636.22%. It got fluctuated and the ratios have been 328.14, 148.09 and
137.00 percent during the year of 2008-09 and 2011-13 respectively. It has been also
shown in the Graph No -[Link].
So, the Average Proprietary Ratio is 188.36%, The Standard Deviation is 389.66
and The Co-efficient variance is 206.88% which shows solvency of this company
because the average Proprietary Ratio shows satisfactory Ratio of during the study
period.

5. Bajaj Auto Ltd. :

Table No -6.6.4.1shows that the Proprietary Ratio of the Bajaj Auto Ltd during
the year from 2003-2004 to 2012-2013, the highest ratio was 95.82% in the year 2012-13
and the lowest ratio was 54.33% in the year 2007-08.

Chapter-6 [285]
 Analysis and Evaluation of Capital Structure

In the year 2003-04 the ratio was 86.84% which has been decreased 75.15% in
the year 2004-05, further it has been decreased up to 75.42% in the year of 2005-06.
During the year of 2012-13 it increased up to 95.82%. It got fluctuated and the ratios
have been 76.51, 54.33, 54.36, 68.63, 88.41 and 93.88 during the year of 2006-12
respectively. It has been also shown in the Graph No -[Link].
So, The Average Proprietary Ratio 76.93 %, The Standard Deviation is 14.79 and
The Co-efficient variance is 19.22% which shows solvency of this company because the
average Proprietary Ratio shows satisfactory Ratio of during the study period.

6. Hindustan Motors Limited:

Table No -6.6.4.1shows that the Proprietary Ratio of the Hindustan Motors
Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 55.64% in
the year 2007-08 and the lowest ratio was -37.91% in the year 2012-13.
In the year 2003-04 the ratio was 16.88% which has been increased 45.00% in the
year 2004-05, further it has been decreased up to 38.43% during the year of 2005-06.
During the year of 2007-08, it increased up to 55.64%. It got fluctuated and the ratios
have been and 39.46, 49.09, 43.97, 24.18, 17.26 and -37.91 percent during the year of
2006-07 and 2008-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Proprietary Ratio 29.20%, The Standard Deviation is 27.03 and
The Co-efficient variance is 92.58% which shows solvency of this company because the
average Proprietary Ratio shows satisfactory Ratio of during the study period.

7. Maruti Suzuki India Limited :

Table No -6.6.4.1shows that the Proprietary Ratio of the Maruti Suzuki India
Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 98.70% in
the year 2005-06 and the lowest ratio was 90.34% in the year 2007-08.
In the year 2003-04 the ratio was 92.01% which has been increased 93.44% in the
year 2005-06, further it has been increased up to 98.70% during the year of 2005-06.
During the year of 2007-08, it decreased up to 90.34%. It got fluctuated and the ratios
have been 91.57, 93.04, 93.51, 96.22, 91.00 and 91.53 percent during the year of 2006-07
and 2008-2013 respectively. It has been also shown in the Graph No -[Link].
Chapter-6 [286]
 Analysis and Evaluation of Capital Structure

So, The Average Proprietary Ratio 93.14%, The Standard Deviation is 2.57 and
The Co-efficient variance is 2.76 % which shows solvency of this company because the
average Proprietary Ratio shows satisfactory Ratio of during the study period.
8. Mahindra and Mahindra Limited :
Table No -6.6.4.1shows that the Proprietary Ratio of the Mahindra and Mahindra
Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 41.27% in
the year 2003-04 and the lowest ratio was 30.84% in the year 2008-09.
In the year 2003-04 the ratio was 41.27% which has been decreased 35.58% in the
year 2004-05, further it has been increased up to 36.97% during the year of 2005-06.
During the year of 2008-09, it decreased up to 30.84%. It got fluctuated and the ratios
have been 33.11, 32.01, 37.27 36.97, 34.60 and 34.22 percent during the year of 2006-08
and 2009-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Proprietary Ratio 35.25%, The Standard Deviation is 3.01 and
The Co-efficient variance is 8.53% which shows solvency of this company because the
average Proprietary Ratio shows satisfactory Ratio of during the study period.

9. Ashok Leyland :
Table No -[Link] shows that the Proprietary Ratio of the Ashok Leyland during
the year from 2003-2004 to 2012-2013, the highest ratio was 74.74% in the year 2006-07
and the lowest ratio was 50.11% in the year 2012-13.
In the year 2003-04 the ratio was 67.83% which has been decreased 57.02% in the
year 2004-05, further it has been increased up to 67.12%in the year of 2005-06
respectively. During the year of 2006-07, it increased up to 74.74%. It got fluctuated and
the ratios were 70.77 63.95, 61.67, 59.96, 57.03 and 50.11 percent during the year of
2007-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Proprietary Ratio 63.02%, The Standard Deviation is 7.36 and
The Co-efficient variance is 11.69% which shows solvency of this company because the
average Proprietary Ratio shows satisfactory Ratio of during the study period.

Chapter-6 [287]
 Analysis and Evaluation of Capital Structure

10. Tata Motors Limited :

Table No -6.6.4.1shows that the Proprietary Ratio of the Tata Motors Limited
during the year from 2003-2004 to 2012-13, the highest ratio was 74.02 % in the year
2003-04 and the lowest ratio was 47.42 % in the year 2009-10.
In the year 2003-04 the ratio was 74.02% which has been decreased 62.23% in
the year 2004-05, further it has been increased up to 65.34% in the year of 2005-06.
During the year of 2009-10, it increased up to 47.42%. It got fluctuated and the ratios
were and 63.15, 55.52, 48.16, 47.42, 50.69, 51.11 and 50.54 percent during the year of
2006-09 and 2010-2013 respectively. It has been also shown in the Graph No -[Link].
So, The Average Proprietary Ratio 56.82%, The Standard Deviation is 8.90 and
The Co-efficient variance is 15.66% which shows solvency of this company because the
average Proprietary Ratio shows satisfactory Ratio of during the study period.

 ANOVA TEST OF PROPRIETARY RATIO :

Hypothesis:

 Ho: Null Hypothesis:

There is no significant difference in Proprietary Ratio of
automobile industry under study.
 H1: Alternative Hypothesis:
There is significant difference in Proprietary Ratio of automobile
industry under study.
 Level of Significance: 5%

Chapter-6 [288]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link]
PROPRIETARY RATIO
ONE WAY ANOVA TEST

Source Degrees
Sum of Mean F
of of F-Value P-value
Square Square critical
Variation Freedom
Between
103459.8814 9 11495.54238 0.636458 0.763095 1.985595
Groups
Within
1625557.407 90 18061.74896
Groups

Total 1729017.288 99

 Degree of freedom = 100-1= 99

 Table Value of „F‟ =1.98
 Calculate Value of „F‟ = 0.64

Fcal < Ftab

0.64 < 1.98
Fcal < Ftab

Table No. 5.4.2 table indicates the calculate value of „F‟ is 0.636458 and the table
value of „F‟ at 5% levels of significance is 1.98. So, the calculate value „F‟ which is less
than the table value. It indicates that the Null Hypothesis is accepted and Alternate
Hypothesis is rejected. So, it indicates that there is no significant difference in Proprietary
Ratio of selected automobile industry under study for the period.

Chapter-6 [289]
 Analysis and Evaluation of Capital Structure

6.6.5 TOTAL ASSETS TO DEBT RATIO:

 Meaning :
This Ratio establishes a relationship between Total Assets and Total Long
Term debts.
 Objective :
The objective of computing this ratio is to measure the safety margin
available to the suppliers of long –term debts. It measure the extent to which debt
is being covered by assets
 Components:
1. Total Assets without preliminary expenses.
2. Long term debts which mean long term loan whether secured or unsecured,
debenture, bonds etc.
 Computation and interpretations :
This ratio is computed by dividing the total assets by total long term debts.
This ratio is usually express as a pure ratio e.g. 2:1. In the form of a formula, this
ratio may be express as follows:

This ratio indicates the margin of safety to long terms creditors. A high
Total Assets to Debts ratio implies the use of more equity than debt which means
a larger safety m margin for creditor since owner‟s equity is treated as margin of
safety by creditors and vice versa.
An enterprise should have neither a very high nor a very low ratio; it
should have a satisfactory ratio. To judge whether the ratio is satisfactory or not, it
should be compare with its own past ratio or with the ratio of similar firm in the
same industry or with the industry average.
The Total Assets to Debts ratio of selected companies of Automobile
Industry in India is given in the Table No-[Link] as follows:

Chapter-6 [290]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link] TOTAL ASSETS TO DEBT RATIO

COMPANY NAME
YEAR MM
HMC TMC SIL LML BAL HML MSI ALL TML
L
2003-2004 7.52 5.83 3.06 37.59 4.23 1.20 12.51 1.86 3.11 3.85
2004-2005 8.40 4.63 3.43 1.07 4.48 1.82 15.24 1.69 2.33 2.65
2005-2006 11.82 2.99 2.50 0.56 4.31 1.62 77.05 1.83 3.04 2.89
2006-2007 15.95 2.28 2.62 0.14 4.45 1.65 11.87 1.80 3.96 2.71
2007-2008 23.62 2.23 2.07 -0.19 2.19 2.25 10.35 1.86 3.42 2.25
2008-2009 49.42 1.89 0.88 -0.44 2.19 1.96 14.37 1.79 2.77 1.93
2009-2010 53.48 1.86 0.42 -0.19 3.19 1.78 15.41 1.86 2.61 1.90
2010-2011 7.44 2.36 0.44 -0.19 17.08 1.43 46.61 2.28 2.57 2.47
2011-2012 8.42 2.47 0.33 -2.29 51.47 1.32 13.49 2.09 2.38 2.39
2012-2013 9.32 3.01 3.76 -2.97 93.25 0.88 14.61 2.03 2.04 2.25
Average 19.54 2.96 1.95 3.31 18.68 1.59 23.15 1.91 2.82 2.53
S.D. 17.57 1.29 1.33 12.11 30.26 0.40 21.67 0.17 0.57 0.56
C.V. 89.90 43.66 68.00 365.69 161.96 24.98 93.60 9.12 20.23 22.26
Min 7.44 1.86 0.33 -2.97 2.19 0.88 10.35 1.69 2.04 1.90
Max 53.48 5.83 3.76 37.59 93.25 2.25 77.05 2.28 3.96 3.85
(Sources: Annual Reports and Accounts from 2003-2004 to 2012-2013)
GRAPH NO. [Link] TOTAL ASSETS TO DEBT RATIO

The above mentioned Table No-[Link] and Graph No-[Link] the indicated a
fluctuating trends of the Net Fixed Assets to Long Term Debt Ratio of selected
Automobile industry in India from 2003-04 to 2012-13.

Chapter-6 [291]
 Analysis and Evaluation of Capital Structure

1. Hero MotoCorp Ltd. :

Table No-6.6.5.1shows that the Total Assets to Debt Ratio of the Hero MotoCorp
Ltd during the year from 2003-2004 to 2012-2013, the highest ratio was 53.48 times in
the year of 2009-10 and lowest ratio was 7.44 times in the year of 2010-11.
In the year 2003-04 the ratio was 7.52 times which has been increased 8.40 times
in the year 2004-05, further it has been increased up to 11.82 and 15.95 times in the year
of 2005-07 respectively. During the year of 2009-10, it increased up to 53.48 times. It got
fluctuated and the ratios have been 49.42, 7.44, 8.42 and 9.32 times during the year of
2008-09 and2010-2013 respectively. It has been also shown in the Graph No [Link].
So, The Average Total Assets to Debt Ratio is 19.54 times, The Standard
Deviation is 17.57 and The Co-efficient variance is 89.90% which shows solvency of this
company because the average Total Assets to Debt Ratio shows satisfactory Ratio of
during the study period.

2. TVS Motor Company:

Table No 6.6.5.1shows that the Total Assets to Debt Ratio of the TVS Motor
Company Ltd during the year from 2003-2004 to 2012-2013, the highest ratio was 5.83
times in the year 2003-04 and the lowest ratio was 1.86 times in the year 2009-10.
In the year 2003-04 the ratio was 5.83 times which has been decreased 4.63 times
in 2004-05, further it has been decreased up to 2.99 times and 2.28 times in the year of
2005-07 respectively. During the year of 2009-10, it decreased up to 1.86 times. It got
fluctuated and the ratios have been 2.36, 2.47 and 3.01 times during the year of 2010-13
respectively. It has been also shown in the Graph No [Link].
So, The Average Total Assets to Debt Ratio is 2.96 times, The Standard Deviation
is 1.29 and The Co-efficient variance is 43.66 % which shows solvency of this company
because the average Total Assets to Debt Ratio shows satisfactory Ratio of during the
study period.

3. Scooters India Limited:

Table No 6.6.5.1shows that the Total Assets to Debt Ratio of the Scooters India
Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 3.76 times
Chapter-6 [292]
 Analysis and Evaluation of Capital Structure

in the year 2012-13 and the lowest ratio was 0.33 times in the year 2011-12.
In the year 2003-04 the ratio was 3.06 times which has been increased 3.43 times
in 2004-05, further it has been decreased up to 2.50 times in the year of 2005-06. During
the year of 2012-13, it decreased up to 3.76 times. It got fluctuated the ratios have been
0.88, 0.42, 0.44, 0.33 and 3.76 percent during the year of 2008-12 respectively. It has
been also shown in the Graph No [Link].
So, The Average Total Assets to Debt Ratio is 1.95 times, The Standard Deviation
is 1.33 and The Co-efficient variance is 68.00 % which shows solvency of this company
because the average Total Assets to Debt Ratio shows satisfactory Ratio of during the
study period.

4. LML :
Table No 6.6.5.1shows that the Total Assets to Debt Ratio of the LML during the
year from 2003-2004 to 2012-2013, the highest ratio was 37.59 times in the year
2003-04 and the lowest ratio was -2.97 times in the year 2012-13.
In the year 2003-04 the ratio was 37.59 times which has been decreased 1.07
times in the year 2004-05, further it has been decreased up to 0.56 times in the year
2005-06. During the year of 2012-13, it decreased up -2.97 times. It got fluctuated the
ratios have been 0.14, -0.19, -0.44, -0.19, -0.19 and -2.29 times in the year of 2005-13
respectively. It has been also shown in the Graph No [Link].
So, The Average Total Assets to Debt Ratio is 3.31 times, The Standard Deviation
is 12.11 and The Co-efficient variance is 365.69% which shows solvency of this
company because the average Total Assets to Debt Ratio shows satisfactory Ratio of
during the study period.

5. Bajaj Auto Ltd. :

Table No 6.6.5.1shows that the Total Assets to Debt Ratio of the Bajaj Auto Ltd
during the year from 2003-2004 to 2012-2013, the highest ratio was 93.25 times in the
year 2012-13 and the lowest ratio was 2.19 times in the year 2007-09.
In the year 2003-04 the ratio was 4.23 times which has been increased 4.48 times
in the year 2004-05, further it has been decreased up to 4.31 times in the year of 2005-06.
Chapter-6 [293]
 Analysis and Evaluation of Capital Structure

During the year of 2012-13, it increased up to 93.25 times. It got fluctuated and the ratios
have been 4.45, 2.19, 2.19, 3.19, 17.08 and 51.47 times during the year of 2006-12
respectively. It has been also shown in the Graph No [Link].
So, The Average Total Assets to Debt Ratio 18.68 times, The Standard Deviation
is 30.26 and The Co-efficient variance is 161.96% which shows solvency of this
company because the average Total Assets to Debt Ratio shows satisfactory Ratio of
during the study period.

6. Hindustan Motors Limited :

Table No 6.6.5.1shows that the Total Assets to Debt Ratio of the Hindustan
Motors Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 2.25
times in the year 2007-08 and the lowest ratio was 0.88 times in the year 2012-13.
In the year 2003-04 the ratio was 1.20 times which has been increased 1.82 times
in the year 2004-05, further it has been decreased up to 1.62 times during the year of
2005-06. During the year of 2007-08, it increased up to 2.25 times. It got fluctuated and
the ratios have been 1.65, 1.96, 1.78, 1.43, 1.32 and 0.88 percent during the year of 2006-
07 and 2008-13 respectively. It has been also shown in the Graph No [Link].
So, The Average Total Assets to Debt Ratio 1.59 times, The Standard Deviation is
0.40 and The Co-efficient variance is 24.98% which shows solvency of this company
because the average Total Assets to Debt Ratio shows satisfactory Ratio of during the
study period.

7. Maruti Suzuki India Limited :

Table No [Link] shows that the Total Assets to Debt Ratio of the Maruti Suzuki
India Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 77.05
times in the year 2005-06 and the lowest ratio was 10.35times in the year 2007-08.
In the year 2003-04 the ratio was 12.51 times which has been increased 15.24 in
the year 2004-05, further it has been increased up to 77.05 times in the year 2005-06.
During the year of 2007-08, it increased up to 10.35 times. It got fluctuated and the ratios
have been 11.87, 14.37, 15.41, 46.61, 13.49 and 14.61 times during the year of 2006-07
and 2008-2013 respectively. It has been also shown in the Graph No [Link].
Chapter-6 [294]
 Analysis and Evaluation of Capital Structure

So, The Average Total Assets to Debt Ratio 23.15 times, The Standard Deviation
is 21.67 and The Co-efficient variance is 93.60 % which shows solvency of this company
because the average Total Assets to Debt Ratio shows satisfactory Ratio of during the
study period.

8. Mahindra and Mahindra Limited :

Table No 6.6.5.1shows that the Total Assets to Debt Ratio of the Mahindra and
Mahindra Limited during the year from 2003-2004 to 2012-2013, the highest ratio was
2.28 times in the year 2010-11 and the lowest ratio was 1.69 times in the year 2004-05.
In the year 2003-04 the ratio was 1.86 times which has been decreased 1.69 times
in the year 2004-05, further it has been increased up to 1.83 times in the year 2005-06
During the year of 2010-11, it increased up to 2.28 times. It got fluctuated and the ratios
have been 1.80, 1.86, 1.79, 1.86, 2.09 and 2.03 times during the year of 2006-10 and
2011-13 respectively. It has been also shown in the Graph No [Link].
So, The Average Total Assets to Debt Ratio 1.91 times, The Standard Deviation is
0.17 and The Co-efficient variance is 9.12% which shows solvency of this company
because the average Total Assets to Debt Ratio shows satisfactory Ratio of during the
study period.

9. Ashok Leyland :
Table No 6.6.5.1shows that the Total Assets to Debt Ratio of the Ashok Leyland
during the year from 2003-2004 to 2012-2013, the highest ratio was 3.96 times in the
year 2006-07 and the lowest ratio was 2.04 times in the year 2012-13.
In the year 2003-04 the ratio was 3.11 times which has been decreased 2.33 times
in the year 2004-05, further it has been decreased up to 3.04 times in the year of 2005-06.
During the year of 2006-07, it increased up to 3.96 times. It got fluctuated the ratios were
3.42, 2.77, 2.61, 2.57, 2.38 and 2.04 percent during the year of 2007-13 respectively. It
has been also shown in the Graph No [Link].
So, The Average Total Assets to Debt Ratio 2.82 times, The Standard Deviation is
0.57 and The Co-efficient variance is 20.23% which shows solvency of this company
Chapter-6 [295]
 Analysis and Evaluation of Capital Structure

because the average Total Assets to Debt Ratio shows satisfactory Ratio of during the
study period.

10. Tata Motors Limited :

Table No [Link] shows that the Total Assets to Debt Ratio of the Tata Motors
Limited during the year from 2003-2004 to 2012-13, the highest ratio was 3.85times in
the year 2003-04 and the lowest ratio was 1.90 times in the year 2009-10.
In the year 2003-04 the ratio was 3.85 times which has been decreased 2.65 times
in the year 2004-05, further it has been increased up to 2.89 times in the year of 2005-06.
During the year of 2009-10, it decreased up to 1.90 times. It got fluctuated and the ratios
were 2.71, 2.25, 1.93, 2.47, 2.39 and 2.25 times during the year of 2006-09 and 2010-13
respectively. It has been also shown in the Graph No [Link].
So, The Average Total Assets to Debt Ratio 2.53 times, The Standard Deviation is
0.56 and The Co-efficient variance is 22.26% which shows solvency of this company
because the average Total Assets to Debt Ratio shows satisfactory Ratio of during the
study period.

 ANOVA Test of Total Assets to Debt Ratio :

Hypothesis:

 Ho: Null Hypothesis:

There is no significant difference in Total Assets to Debt Ratio of
automobile industry under study.
 H1: Alternative Hypothesis:
There is significant difference in Total Assets to Debt Ratio of
automobile industry under study.
 Level of Significance: 5%

Chapter-6 [296]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link]
TOTAL ASSETS TO DEBT RATIO
ONE WAY ANOVA TEST

Source Sum Degrees

Mean F
of of of F-Value P-value
Square critical
Variation Square Freedom
Between
627.3560546 9 69.70622 0.273605 0.980267 1.985595
Groups
Within
22929.29203 90 254.76991
Groups

Total 23556.64809 99

 Degree of freedom = 100-1= 99

 Table Value of „F‟ =1.98
 Calculate Value of „F‟ = 0.27

Fcal < Ftab

0.27 < 1.98
Fcal < Ftab

Table No.[Link] table indicates the calculate value of „F‟ is 0.273605 and the
table value of „F‟ at 5% levels of significance is 1.98. So, the calculate value „F‟ which is
less than the table value. It indicates that the Null Hypothesis is accepted and Alternate
Hypothesis is rejected. So, it indicates that there is no significant difference in Total
Assets to Debt Ratio of selected automobile industry under study for the period.

Chapter-6 [297]
 Analysis and Evaluation of Capital Structure

6.6.6 INTEREST COVERAGE RATIO:

 Meaning :
This Ratio establishes a relationship between Net Profit Before Interest
and Taxes and Interest on Long term debt.
 Objective :
The objective of computing this ratio is to measure the debt servicing
capacity of a firm so far as fixed interest on long term debt is concerned.
 Components :
1. Net profit before interest and taxes.
2. Interest on long term debt.
 Computation and interpretations:
This ratio is computed by dividing the net profit before interest and taxes
by interest on long term debt. This ratio is usually express as a „x‟ number of
times. In the form of a formula, this ratio may be express as follows:

This ratio shows the number of times the amount of interest on long term
debts is covered by the profit out of which that will be paid it indicates the limit
beyond which the ability of the firm to service its debt would be adversely
affected. For instance, interest coverage of five times would imply that even if the
firm‟s net profit before interest and tax decrease by 80% of the present level. the
firm will still be able to pay interest out of profit. Higher the ratio greater the
firm‟s ability to pay interest but very high ratio may imply lesser use of debt and
very efficient operations.
An enterprise should have neither a very high nor a very low ratio; it
should have a satisfactory ratio. To judge whether the ratio is satisfactory or not, it
should be compare with its own past ratio or with the ratio of similar firm in the
same industry or with the industry average.
The interest coverage Ratio of selected companies of Automobile Industry
in India is given in the Table No-[Link] as follows:

Chapter-6 [298]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link] INTEREST COVERAGE RATIO

COMPANY NAME
YEAR
HMC TMC SIL LML BAL HML MSI MML ALL TML
2003-2004 624.52 21.83 5.72 -6.37 1022.72 -0.81 18.50 3.89 5.82 7.38
2004-2005 631.70 25.06 2.05 -5.67 1622.55 3.13 36.49 6.51 12.68 8.58
2005-2006 484.64 9.03 2.07 -5.17 4650.24 -3.19 81.30 7.36 12.13 8.00
2006-2007 774.98 3.59 -5.50 -1.94 324.60 1.76 58.33 6.27 21.96 7.98
2007-2008 706.14 4.08 -4.51 -1.51 220.73 3.29 41.76 4.50 9.36 7.05
2008-2009 705.13 1.48 -7.41 -1.01 46.37 -2.44 32.22 3.62 2.30 2.25
2009-2010 1349.44 2.01 -4.08 -1.24 403.61 -2.01 99.05 4.60 6.35 3.27
2010-2011 159.52 4.43 -0.61 -1.24 2573.63 0.87 107.63 4.98 5.24 2.59
2011-2012 135.49 6.54 -0.28 -0.31 182.03 -0.65 35.83 3.32 3.70 2.10
2012-2013 213.36 4.41 -2.02 -0.79 7901.43 -1.59 16.52 3.43 2.25 1.13
Average 578.49 8.25 -1.46 -2.52 1894.79 -0.16 52.76 4.85 8.18 5.03
S.D. 362.73 8.33 4.04 2.27 2556.24 2.31 32.63 1.42 6.10 2.99
C.V. 62.70 100.95 -277.37 -90.12 134.91 -1408.18 61.84 29.19 74.53 59.38
Min 135.49 1.48 -7.41 -6.37 46.37 -3.19 16.52 3.32 2.25 1.13
Max 1349.44 25.06 5.72 -0.31 7901.43 3.29 107.63 7.36 21.96 8.58
(Sources: Annual Reports and Accounts from 2003-2004 to 2012-2013)
GRAPH NO.[Link] INTEREST COVERAGE RATIO

The above mentioned Table No-[Link] and Graph No -[Link] the indicated a
fluctuating trends of the Interest Coverage Ratio of selected Automobile industry in India
from 2003-04 to 2012-13.

Chapter-6 [299]
 Analysis and Evaluation of Capital Structure

1. Hero MotoCorp Ltd :

Table No -[Link] shows that the Interest Coverage Ratio of the Hero MotoCorp
Ltd during the year from 2003-2004 to 2012-2013, the highest ratio was 1349.44 times in
the year of 2009-10 and lowest ratio was 135.49 times in the year of 2011-12.
In the year 2003-04 the ratio was 624.52 times which has been increased 631.70
times in 2004-05, further it has been decreased up to 484.64 times in the year of 2005-06.
During the year of 2009-10, it decreased up to 1349.44 times. It got fluctuated and the
ratios have been 774.98, 706.14, 705.13, 159.52, 135.49 and 213.36 times during the year
of 2006-09 and 2010-13 respectively. It has been also shown in the Graph No-[Link].
So, The Average Interest Coverage Ratio is 578.49 times, The Standard Deviation
is 362.73 and The Co-efficient variance is 47.88% which shows solvency of this
company because the average Interest Coverage Ratio shows satisfactory Ratio of during
the study period.

2. TVS Motor Company:

Table No-[Link] shows that the Interest Coverage Ratio of the TVS Motor
Company during the year from 2003-2004 to 2012-2013, the highest ratio was 25.06
times in the year 2004-05 and the lowest ratio was 1.48 times in the year 2008-09.
In the year 2003-04 the ratio was 21.83 times which has been increased 25.06
times in 2004-05, further it has been decreased up to 9.03 and 3.59 times in the year of
2005-07 respectively. During the year of 2008-09, it increased up to 1.48 times. It got
fluctuated the ratios have been 4.08, 2.01, 4.43, 6.54 and 4.41 times during the year of
2007-08 and 2009-2013 respectively. It has been also shown in the Graph No -[Link].
So, The Average Interest Coverage Ratio is 8.25 times , The Standard Deviation
is 8.33 and The Co-efficient variance is 100.95% which shows solvency of this company
because the average Interest Coverage Ratio shows satisfactory Ratio of during the study
period.

3. Scooters India Limited:

Table No -[Link] shows that the Interest Coverage Ratio of the Scooters India
Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 5.72 times
Chapter-6 [300]
 Analysis and Evaluation of Capital Structure

in the year 2003-04 and the lowest ratio was -7.41 times in the year 2008-09.
In the year 2003-04 the ratio was 5.72 times which has been decreased 2.05 times
in 2004-05, further it has been decreased up to 2.07 and -5.50 times in the year of
2005-06 respectively. During the year of 2008-09, it increased up to -7.41 times. It got
fluctuated the ratios have been -4.51, -4.08, -0.61 -0.28 and -2.02 times during the year of
2007-08 and 2009-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Interest Coverage Ratio is -1.46 times, The Standard Deviation
is 4.04 and The Co-efficient variance is -277.37 % which shows solvency of this
company because the average Interest Coverage Ratio shows dissatisfactory Ratio of
during the study period.

4. LML:
Table No -[Link] shows that the Interest Coverage Ratio of the LML during the
year from 2003-2004 to 2012-2013, the highest ratio was -0.31 times in the year
2011-12 and the lowest ratio was -6.37 times in the year 2003-04.
In the year 2004-05 the ratio was -6.37 times which has been decreased -5.67
times in the year 2005-06, further it has been increased up to -5.17 times in the year of
2006-07. During the year of 2011-12, it increased up to -0.31 times. It got fluctuated and
the ratios have been -1.94, -1.51, -1.01, -1.24, -1.24 and -0.79 times during the year of
2006-11 and 2012-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Interest Coverage Ratio is -2.52 times, The Standard Deviation
is 2.27 and The Co-efficient variance is -90.12% which shows solvency of this company
because the average Interest Coverage Ratio shows dissatisfactory Ratio of during the
study period.

5. Bajaj Auto Ltd. :

Table No -[Link] shows that the Interest Coverage Ratio of the Bajaj Auto Ltd
during the year from 2003-2004 to 2012-2013, the highest ratio was 7901.43 times in the
year 2012-13 and the lowest ratio was 46.37 times in the year 2008-09.
In the year 2003-04 the ratio was 1022.72 times which has been increased
1622.55 times in the year 2004-05, further it has been increased up to 4650.24 times in
Chapter-6 [301]
 Analysis and Evaluation of Capital Structure

the year of 2005-06. During the year of 2012-13 it increased up to 7901.43 times. It got
fluctuated and the ratios have been 324.60, 220.73, 46.73, 403.61, 2573.63 and 182.03
during the year of 2006-12 times respectively. It has been also shown in the Graph
No -[Link].
So, The Average Interest Coverage Ratio 1894.79, The Standard Deviation is
2556.24 and The Co-efficient variance is 134.91% which shows solvency of this
company because the average Interest Coverage Ratio shows satisfactory Ratio of during
the study period.

6. Hindustan Motors Limited :

Table No-[Link] shows that the Interest Coverage Ratio of the Hindustan Motors
Limited during the year from 2003-2004 to 2012-2013, the highest ratio was 3.29 times
in the year 2007-08 and the lowest ratio was -3.19 times in the year 2005-06.
In the year 2003-04 the ratio was -0.81 times which has been increased 3.13 times
in the year 2004-05, further it has been decreased up to -3.19 times during the year of
2005-06. During the year of 2007-08, it increased up to 3.29 times. It got fluctuated and
the ratios have been 1.76, -2.44, -2.01, 0.87, -0.65 and -1.59 during the year of 2006-07
and 2008-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Interest Coverage Ratio -0.16 times, The Standard Deviation is
2.31 and The Co-efficient variance is -1408.18% which shows solvency of this company
because the average Interest Coverage Ratio shows dissatisfactory Ratio of during the
study period.

7. Maruti Suzuki India Limited :

Table No -[Link] shows that the Interest Coverage Ratio of the Maruti Suzuki
India Ltd during the year from 2003-2004 to 2012-2013, the highest ratio was 107.63
times in the year 2010-11 and the lowest ratio was 16.52 times in the year 2012-13.
In the year 2003-04 the ratio was 18.50 times which has been increased 36.49
times in the year 2004-05, further it has been increased up to 81.30 times during the year
of 2005-06. During the year of 2010-11, it increased up to 107.63 times. It got fluctuated
and the ratios have been 58.33, 41.76, 32.22, 99.05, 35.83 and 16.52 times during the
Chapter-6 [302]
 Analysis and Evaluation of Capital Structure

year of 2006-10 and2011-2013 respectively. It has been also shown in the Graph
No-[Link].
So, The Average Interest Coverage Ratio 52.76 times, The Standard Deviation is
32.63 and The Co-efficient variance is 61.84% which shows solvency of this company
because the average Interest Coverage Ratio shows satisfactory Ratio of during the study
period.

8. Mahindra and Mahindra Limited :

Table No -[Link] shows that the Interest Coverage Ratio of the Mahindra and
Mahindra Limited during the year from 2003-2004 to 2012-2013, the highest ratio was
7.36 times in the year 2005-06 and the lowest ratio was 3.32 times in the year 2011-12.
In the year 2003-04 the ratio was 3.89 times which has been increased 6.51 times
in the year 2004-05, further it has been increased up to 7.36 times during the year of
2005-06. During the year of 2011-12, it increased up to 3.32 times. It got fluctuated and
the ratios have been 6.27, 4.50, 3.62, 4.60 4.98 and 3.43 times during the year of 2006-11
and 2012-13 respectively. It has been also shown in the Graph No -[Link].
So, The Average Interest Coverage Ratio 4.85 times, The Standard Deviation is
1.42 and The Co-efficient variance is 29.19% which shows solvency of this company
because the average Interest Coverage Ratio shows satisfactory Ratio of during the study
period.

9. Ashok Leyland :
Table No -[Link] shows that the Interest Coverage Ratio of the Ashok Leyland
during the year from 2003-2004 to 2012-2013, the highest ratio was 21.96 times in the
year 2006-07 and the lowest ratio was 2.25 times in the year 2012-13.
In the year 2003-04 the ratio was 5.82 times which has been increased 12.63 times
in the year 2004-05, further it has been decreased up to 12.13 times in the year of 2005-
06. During the year of 2012-13, it decreased up to 2.25 times. It got fluctuated and the
ratios were 21.96, 9.36, 2.30, 6.35, 5.24 and 3.70 during the year of 2007-12 respectively.
It has been also shown in the Graph No -[Link].

Chapter-6 [303]
 Analysis and Evaluation of Capital Structure

So, The Average Interest Coverage Ratio 8.18 times, The Standard Deviation is
6.10 and The Co-efficient variance is 74.53% which shows solvency of this company
because the average Interest Coverage Ratio shows satisfactory Ratio of during the study
period.

10. Tata Motors Limited :

Table No -[Link] shows that the Interest Coverage Ratio of the Tata Motors
Limited during the year from 2003-2004 to 2012-13, the highest ratio was 8.58 times in
the year 2004-05 and the lowest ratio was 1.13 times in the year 2012-13.
In the year 2003-04 the ratio was 7.38 times which has been increased 8.58 times
in the year 2004-05, further it has been decreased up to 8.00, 7.98 and 7.05 times in the
year of 2005-08 respectively. During the year of 2012-13, it increased up to 1.13 times. It
got fluctuated and the ratios were 2.25, 3.27, 2.59 and 2.10 during the year of 2008-12
respectively. It has been also shown in the Graph No -[Link].
So, The Average Interest Coverage Ratio 5.03 times, The Standard Deviation is
2.99 and The Co-efficient variance is 59.38% which shows solvency of this company
because the average Interest Coverage Ratio shows satisfactory Ratio of during the study
period.

 ANOVA Test of Interest Coverage Ratio :

Hypothesis:

 Ho: Null Hypothesis:

There is no significant difference in Interest Coverage Ratio of
automobile industry under study.
 H1: Alternative Hypothesis:
There is significant difference in Interest Coverage Ratio of
automobile industry under study.
 Level of Significance: 5%

Chapter-6 [304]
 Analysis and Evaluation of Capital Structure

TABLE NO.[Link]
INTEREST COVERAGE RATIO
ONE WAY ANOVA TEST

Source Sum Degrees

Mean F
of of of F-Value P-value
Square critical
Variation Square Freedom
Between
52845266.89 9 5871696.321 1.59701 0.12807 1.985595
Groups
Within
330901366 90 3676681.844
Groups

Total 383746632.8 99

 Degree of freedom = 100-1= 99

 Table Value of „F‟ =1.98
 Calculate Value of „F‟ = 1.59

Fcal < Ftab

1.59 < 1.98
Fcal < Ftab

Table No. 5.6.2 table indicates the calculate value of „F‟ is 1.59701 and the table
value of „F‟ at 5% levels of significance is 1.98. So, the calculate value „F‟ which is less
than the table value. It indicates that the Null Hypothesis is accepted and Alternate
Hypothesis is rejected. So, it indicates that there is no significant difference in Interest
Coverage Ratio of selected automobile industry under study for the period.

Chapter-6 [305]
 Analysis and Evaluation of Capital Structure

6.7 CONCLUSION :
Chapter titled “Analysis and Evaluation of Capital Structure” describe that its one
of the important measurement of the financial position of the business organization. The
concept and nature of capital structure or current assets denotes that “Investment in Total
debt is turned over many times in a year. Investment in current assets such as inventories
and book debts is realized during the firms operating cycle which is usually less than
year.”
Therefore measurement liquidity has its own important. Importance of liquidity
describes that its lifeblood and controlling nerve centre of the business. Without
circulation of blood no one can live, just like without circulation of liquidity business
can‟t maintain. The performance of liquidity can be judged by investment in working
capital, short-term creditors, and efficiency in capital structure. In the present study there
were six types of ratios was calculated. Thus above analysis describe that the need for
liquidity to rub day-to-day business activities can‟t be over emphasized.

Chapter-6 [306]
 Analysis and Evaluation of Capital Structure

6.8 REFERENCES:

1. Brigham E.F., Fundamental of financial management, The Dryden presses

Hinsdale, Illinois, 1978.
2. Dr. P.C. Tulsian, Financial Management, S. Chand & Co. Ltd, New Delhi, 2010,
P-13.54.
3. E.W. Walker, Essentials of financial management Prentice Hall of India Pvt. Ltd,
New Delhi.
4. Gower Press, Financial Management Hand Book, Gower Press, Essex, 1961,
P.61.
5. Gupta R.L.& M. Radhaswami, Financial Statement Analysis. Sultan
Chand&Sons. Delhi,1980, P.40.
6. Guthaman H.G., Corporation Finance Principles and Problems, Chaitanya
Publishing House, Allah bad, eighth Edition, P.146.
7. John N. Mayer, Financial statement analysis, prentice Hall of India, New Delhi,
1947, P.178
8. Khan, M.Y. And Jain P.K., Financial Management, Tata McGraw hill publishing
co. ltd. New Delhi 1982, P.139.
9. Kulshreshtha N.K., Analysis of Financial statements Indian paper industry,
Navman prakashan, aligarh, 1961, P.103
10. Man Mohan and S.N Goyal, Principles Management Accounting, sahitya Bhavan,
Agra, 1985, P-440-450.
11. P.V. Kulkarni and B. G. Satyaprasad, Financial Management, Himalaya
Publishing House, Mumbai, 2008, P-350-360.
12. Panday I.M., Financial Management, Vikas Publishing House Pvt. Ltd., New
Delhi, 1994, P.123.
13. Wesel. H. Principles of Financial analysis, Macmillan, new York, 1961, p.141
14. Weston and Brigham, Managerial finance, Holt, Rinehart, Winston, New York,
1969, P. 28.

Chapter-6 [307]
 Analysis and Evaluation of Capital Structure

15. Wright M.G., Financial Management, Tata McGraw-Hill publishing Co. , New
Delhi, 1978, P.201.
16. Hero MotoCorp Ltd Annual Reports from 2003-2004 to 2012-2013.
17. TVS Motor Company Annual Reports from 2003-2004 to 2012-2013.
18. Scooters India Limited Annual Reports from 2003-2004 to 2012-2013.
19. LML Annual Reports from 2003-2004 to 2012-2013.
20. Bajaj Auto Ltd Annual Reports from 2003-2004 to 2012-2013.
21. Hindustan Motors Limited Annual Reports from 2003-2004 to 2012-2013.
22. Maruti Suzuki India Limited Annual Reports from 2003-2004 to 2012-2013.
23. Mahindra & Mahindra Limited Annual Reports from 2003-2004 to 2012-2013.
24. Ashok Leyland Annual Reports from 2003-2004 to 2012-2013.
25. Tata Motors Limited Annual Reports from 2003-2004 to 2012-2013.

Chapter-6 [308]