A Study on Leverage Analysis and Profitability for Selected Paint Companies in India

One of the ways to increase the value or impact of resource is to use leverage. Traditionally, discussions on leverage were viewed from the perspective of financial leverage which arises from financing activities. However, operating leverage arising from the operating activities of business is also used extensively these days. Operating leverage increases the returns to limited equity funds by using the money to “control” assets rather than “own” them. The present study makes an attempt to analyse the impact of both financial leverage as well as operating leverage on the profitability (measured through Earning Per Share “EPS”) of the selected paint companies of India. Five listed paint companies of India were selected based upon the market capitalization for the research purpose. The study investigates the impact of degree of financial leverage and degree of operating leverage on EPS with the help of correlation analysis. Along with this analysis, the paper also investigates the impact of debt-equity ratio on the EPS of the said firms to see the impact of debt on the wealth of the firms. The findings suggest that financial leverage had no significant relationship on profitability while operating leverage had significant relationship on profitability with the exceptions of few.