Interrelationship between Capital Structure and Profitability with Special Reference to Manufacturing Industry in India

The determination of a company’s capital structure constitutes a difficult decision, one that involves several and antagonistic factors, such as risk and profitability. That decision becomes even more difficult, in times when the economic environment in which the company operates presents a high degree of instability. Therefore, the choice among the ideal proportion of debt and equity can affect the value of the company, as much as the return rates can. This study analyses how far the capital structure (cs) affects the Profitability (p) of corporate firms in India. The study tries to establish the hypothesized relationship as to how far the cs affect the business revenue of firms and what the interrelationship is between cs and Profitability. This study is carried out after categorizing the selected firms into three categories based on two attributes, viz. business revenue and asset size. First, firms are grouped into low, medium and high based on business revenue. Second, firms are classified into small, medium and large based on asset size to establish the hypothesized relationship that cs has significant impact on Profitability of Manufacturing firms in India. Regression Analysis in addition to descriptive statistics such as Mean, Standard Deviation, and Ratios has been used. The study proves that there has been a strong one-to-one relationship between Capital Structure variables and Profitability variables, Return on Assets (ROA) and Return on Capital Employed (ROCE) and the Capital Structure has significant influence on Profitability, and increase in use of debt fund in Capital Structure tends to minimize the net profit of the Manufacturing firms listed in Bombay Stock Exchange in India.