CAPITAL STRUCTURE ANALYSIS

OF
TVS MOTORS
&
MARUTHI LTD

Submitted by
V.ASHOK KUMAR
10MB05
Introduction to Capital structure :

Capital structure decisions refer to the decisions businesses have to make with regards
to the mix of financing they use. The mix consists of debt and/or equity as sources of capital.
In other words, it is a structure of the liabilities side of the balance sheet , excluding current
liabilities. Enterprises usually try to maintain a certain optimal mix of financing (debt and
equity), referred to as the target capital structure.

Capital structure decisions analysis with debt ratios:

When analyzing capital structure decisions, external stakeholders can obtain an

approximate idea of the capital structure of the particular firm by using information in the
firm’s financial statements to calculate various debt ratios.

THE DEBT RATIO

A direct measure of debt is a debt ratio. Debt ratios provide direct information on the
financial leverage of an enterprise. Debt ratios measure how many of the firm’s assets are
financed by debt. The higher the debt ratio, the higher the degree of financial leverage
(amount of debt) and the higher the risk. The formula for the debt ratio is as follows:

Debt ratio=Total long term debt /Total shareholders capital

TVS motors
Particulars Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Total long term debt 385.04 633.56 666.34 905.98 1,003.29
Total shareholders capital 766.12 809.27 821.58 813.13 865.38
0.50258 0.78287 0.8110470 1.1141883
Debt Equity ratio 4 8 1 8 1.15936352

Maruthi ltd
Particulars Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Total long term debt 71.7 630.8 900.2 698.9 821.4
5,452.6
Total shareholders capital 0 6,853.90 8,415.40 9,344.90 11,835.10
0.09203 0.1069705 0.0747894
Debt Equity ratio 0.01315 5 5 6 0.06940372

INTERPRETATION: Debt to equity ratio indicates the proportionate claims of owners and
the outsiders against the firms assets. The purpose is to get an idea of the cushion available to
outsiders on the liquidation of the firm. However, the interpretation of the ratio depends upon
the financial and business policy of the company. The owners want to do the business with
maximum of outsider's funds in order to take lesser risk of their investment and to increase
their earnings (per share) by paying a lower fixed rate of interest to outsiders. A ratio of 1:1 is
usually considered to be satisfactory ratio although there cannot be rule of thumb or
standard norm for all types of businesses.In both the cases of maruthi Ltd and TVS
motors it holds satisfactory.
2. EBIT ANALYSIS
Earnings Before Interest and Taxes. A measure of a company's earning power from
ongoing operations, equal to earnings before deduction of interest payments and income
taxes. EBIT excludes income and expenditure from unusual, non-recurring or discontinued
activities. In the case of a company with minimal depreciation and amortization activities,
EBIT is watched closely by creditors, since it represents the amount of cash that such a
company will be able to use to pay off creditors. also called operating profit.

TVS motors
Particulars Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
3,373.8 3,899.9
Total Income 1 7 3,343.64 3,689.83 4,407.81
3,088.7 3,677.2
Total Expenses 4 9 3,200.26 3,489.28 4,151.80
EBIT 285.07 222.68 143.38 200.55 256.01

Maruthi ltd
Particulars Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
12,582.0 14,943.8 18,897.1 20,864.5
Total Income 0 0 0 0 30,180.60
10,499.9 12,349.6 15,774.4 18,396.2
Total Expenses 0 0 0 0 25,694.00
EBIT 2,082.10 2,594.20 3,122.70 2,468.30 4,486.60

Interpretation:

EBIT is watched closely by the firm’s creditors since it represents the amount of cash that the
company will be able to pay for its creditors. Thus the earnings of the company should
increase considering the major financial policies of the country. In the above cases the both
the companies are able to with stand in the market with high earnings power.

EPS ANALYSIS

Earnings per Share. Total earnings divided by the number of shares outstanding. Companies
often use a weighted average of shares outstanding over the reporting term. EPS can be
calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for
the coming year ("forward EPS"). Note that last year's EPS would be actual, while current
year and forward year EPS would be estimates.

TVS motors
Particulars Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Net Profit 117 66.6 31.77 31.08 88.01
Shares in issue (lakhs) 2,375.44 2,375.44 2,375.44 2,375.44 2,375.44
 0.04925 0.02803 0.0133743 0.0130838
EPS 4 7 6 9 0.03704998

Maruthi ltd

Particulars Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Net Profit 1,189.10 1,562.00 1,730.80 1,218.70 2,497.60

Shares in issue (lakhs) 2,889.10 2,889.10 2,889.10 2,889.10 2,889.10

0.41158 0.54065 0.599079 0.4218268
EPS 1 3 3 7 0.86449067
INTERPRETATION: EPS is what drives the value of the stock. Earnings per share is very
important for a company to maintain its goodwill with the shareholders. In such case EPS
should increase considerably to increase the profit as well as to maximise the wealth of the
shareholders.

LEVERAGE

The degree to which an investor or business is utilizing borrowed money. Companies

that are highly leveraged may be at risk of bankruptcy if they are unable to make payments
on their debt; they may also be unable to find new lenders in the future. Leverage is not
always bad, however; it can increase the shareholders' return on their investment and often
there are tax advantages associated with borrowing. Also called financial leverage.

DEGREE OF OPERATING LEVERAGE

TVS motors
Net Sales 3,234.96 3,854.96 3,219.50 3,670.92 4,363.11
EBIT 285.07 222.68 143.38 200.55 256.01

Particulars Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
% Change in sales 0.19 0.16 0.14 0.19
% change in EBIT -0.22 -0.36 0.40 0.28
DOL -0.88 -0.46 0.35 0.68

DEGREE OF OPERATING LEVERAGE

Maruthi ltd
Net Sales 12,197.90 14,806.40 18,066.80 20,729.40 29,317.70
EBIT 2,082.10 2,594.20 3,122.70 2,468.30 4,486.60

Particulars Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
% Change in sales 0.21 0.22 0.15 0.41
% change in EBIT 0.25 0.20 -0.21 0.82
DOL 0.87 1.08 -0.70 0.51
DEGREE OF FINANCIAL LEVERAGE
TVS motors
EBIT 285.07 222.68 143.38 200.55 256.01
EBIT - Interest 264.08 180.33 131.91 135.94 180.65
Degree of Financial Leverage
(%) 1.08 1.23 1.09 1.48 1.42
Maruthi ltd
EBIT 2082.10 2594.20 3122.70 2468.30 4486.60
EBIT - Interest 2061.70 2556.60 3063.10 2417.30 4453.10
Degree of Financial Leverage
(%) 1.01 1.01 1.02 1.02 1.01

DEGREE OF COMBINED LEVERAGE

TVS motors
Degree of Operating Leverage (%) -0.88 -0.46 0.35 0.68
Degree of Financial Leverage (%) 1.08 1.23 1.09 1.48 1.42
Degree of Combined Leverage (%) 0.00 -1.08 -0.50 0.52 0.97

Maruthi ltd
Degree of Operating Leverage (%) 0.87 1.08 -0.70 0.51
Degree of Financial Leverage (%) 1.01 1.01 1.02 1.02 1.01
Degree of Combined Leverage (%) 0.00 0.88 1.10 -0.72 0.51

If operating leverage is high, a small percentage increase in sales can produce a much larger
percentage increase in net operating income In both the cases the DOL is fluctuating ear after
year.

The higher the degree of financial leverage, the more volatile EPS will be, all other things
remaining the same.In both the cases the financial leverage is increasing substantially.

It is worth noting that a firm with a relatively high level of combined leverage is seen
as riskier than a firm with less combined leverage, as the high leverage means more fixed
costs to the firm. This statement holds true in both the cases. Thus the company plans to
minimise is its DCL in order to be on the safer side.