Capital Structure and Profitability

CAPITAL STRUCTURE AND PROFITABILITY SS DAIRY
INTRODUCTION
1.1 Introduction to Topic
In order to run and manage a business, funds are needed. Right from
promotional stage up to end, finance plays an important role in companys life. If
funds are inadequate, the business suffers and if funds are not properly managed,
the entire organization suffers. It is therefore necessary that correct estimate of
the current and future need of capital be made to have an optimum capital
structure which shall help the organization to run its works smooth and without
any stress.
The capital structure is made up of debt and equity securities, and refers
to permanent financing of a firm. It is composed of long term debt, preference
share capital and share holders funds.
DEFINATION:
According to Gerestenbeg, capital structure of a company refers to the
composition or makeup of its capitalization and its include all long term capital
resources like loans, reserves, shares and bonds
Definition of Finance
The science that describes the management, creating and study of money,
banking or investment assets and liabilities. Finance consists of financial systems
which include the public, private and government spaces and the study of finance
and financial instruments, which can relates to countless assets and liabilities.
ANMK, RAJAMPET 155N1E0048

Some prefer to divide finance, corporate finance and personal finance. All three of
which would contain many sub- categories.
Finance may be defined as the provision of money at the time when it is
required finance refers to the management of the flows of money through an
organization. Whether it will be a corporation, bank or government agency.
Financial management
Finance management emerged as a district field of study at the turn of this
century, money eminent persons defined it in the following ways.
Definition of Financial Management:
Finance may be defined as the provision of money at the time when it is
required. Finance refers to the flows of money through an organization whether it
will be a corporation , school, bank or government agency.
Objectives of Finance
Traditional objectives
Modern objectives
Traditional Objectives
The financial management is generally concerned with procurement,
allocation and control of financial resources of a concern.
To ensure regular and adequate supply of funds to the concern.

To ensure adequate returns to the shareholders which will depend upon
the earning capacity, market price of the share, expectations of the
shareholders.
To ensure optimum funds utilization. Once the funds are procured, they
should be utilized in maximum possible way at least cost.

Modern objectives
The objectives provide for frame work optimum decision making in other
making. In other work it concerned with the design a method for operating the
internal investment and financing of a firm. The alternative approaches in finance.
Profit maximization approach

Wealth maximization approach
ProfitMaximizationApproach
According to this approach action that increase profits should be undertaken and
this that decreases profits are to be avoided in specific operational terms, as
applicable to financial management.
Wealth Maximization Approach
This is also known as value maximization or net present wealth
maximization. In current academic literature value maximization is almost
universally adopted as an appropriate etc.
PROCUREMENT OF FUNDS
1. As funds can be obtained from different sources so procurement of funds
is considered as an important problem of business concerns.

2. Funds issued by the issue of equity shares are the best from risk point of
view for the company as there is no question of repayment of equity
capital except when the company is under liquidation.

3. From the cost point of view equity capital is most expensive source of
funds as dividend expectations of share holders are normally higher than
prevalent interest rates.
Capitalization, Capital structure and profitability
DEFINITION
According to Gerestenbeg, capital structure of a company refers to the
composition or makeup of its capitalization and its include all long term capital
resources like loans, reserves, shares and bonds.
In the words of Nemmers and Grunewald Profitability refers to the all the
financial resources marshaled by the firm short as well as long term , and all
forms of debit as well as equity.
CAPITAL STRUCTURE
Introduction

In order to run and manage a business, funds are needed. Right from
promotional stage up to end, finance plays an important role in companys life. If
funds are inadequate, the business suffers and if funds are not properly managed,
the entire organization suffers. It is there fore necessary that correct estimate of
the current and future need of capital be made to have an optimum capital
structure which shall help the organization to run its works smooth and with out
any stress.
Capitalization, Capital structure and profitability
The terms, capitalization, capital structure and profitability, don not mean
the same. While capitalization is quantitative aspect of the financial planning of
an enterprise, captital structure is concern with qualitative aspect. Capitalization
refers to total amount of securities issued by a company while capital structure
refers to kinds of securities and proportionate amounts that make up
capitalization. For rising long term finance, a company can issue three types of
securities. Equity shares, preference shares, and debentures. A decision
proportion among these types of securities refers to the capital structure of an
enterprise.
Some authors on financial managements define capital structure in board
sense so as to include even the proportion of short term debt. In fact, they refer
to capital structure as a profitability.
Importance of Capital Structure

The term Capital Structure refers to the relationship various long-term
forms of financing such as debentures, preference share capital and equity share
capital. Financing the firms assets is a very crucial problem in every business as
a general rule there must be a proper mix of debit and equity capital in financing
the firms assets. The use of long term fixed interest baring debit and preference
share capital along with equity shares is called Financial leverage or trading on
EQUITY. the long-term fixed interest baring debit is employed by a firm to earn
from the use of these sources than their cost so as increased the return on owners
equity. It is true that a capital structure cannot affect the total earning of a firm
but it can affect the shares of earning available for equity share holders.
Optimal Capital Structure
The capital structure decision can influence value of the firm through the
cost capital and trading on equity or leverage . the optimum capital structure may
be defined as the capital or the combination of debit equity that leads to the
maximum value of the firm. Optimal capital structure maximizes the value of
the company and hence the wealth of its owners and minimizes the company cost
of capital. Thus, every firm should aim at achieving the Optimal capital structure
and then to maintain it.
Theories of Capital Structure

Different kinds of theories have been propounded by different authors to
explain the relationship between capital structure, cost of capital and value of the
firm .The main contributors to the theories are Durand, Ezra, Solomon,
Modigliani and Miller. The important theories are:
Theories / Approaches of Capital Structure
Net Income Approach
Net Operating Income Approach
The Traditional Approach
Modigliani and Miller Approach
Net Income Approach:
According to this approach, a firm can minimize the weighted average cost
of capital and increase the value of the firm as well as market price of equity a
share by using debt increase its value and reduces the overall costs of capital by
increasing the proportion of debt in its capital structure..
This approach is based upon the following assumptions:
The cost of debt is less than the cost of equity.

There are not taxes.
The risk perception of investors is not changed by the use of debt.
Net Operating Income Approach:

According this approach, change in the capital structure of a company does
not affect the market value of the firm and the overall cost of capital remains
constant irrespective of the method of financing. It implies that the overall cost of
capital remains the same whether the debt equity mix is 50:50 or 20:80 or
0:100. Thus, there is nothing as an optimal capital structure is the optimum
capital structure. This theory presumes that:
I. The market capitalizes the value of the firm as a whole.

II. The business risk remains constant at every level of debt equity mix.
The reasons propounded for such assumptions are that the increased use of
debt increases the financial risk of the equity shareholders and hence the cost of
debt remains constant with the increasing proportion of debts remains constant
with the increasing proportion of debt as the financial risk of the lenders is not
affected.
Thus, the advantage of using the cheaper source of funds, i.e., debt is exactly
offset by the increased cost of equity.
The Traditional Approach:
The traditional approach, also known as Intermediate approach, is a
compromise between the two extremes of net income approach and net operating
income approach. According to this theory, the value of the firm can be increased
initially or the cost of capital can be decreased by using more debt as the debt is a
cheaper source of funds than equity. Thus, optimum capital structure can be
reached by a proper debt equity mix. Beyond a particular point, the cost of equity

increases because increased debt increases the financial risk of the equity
shareholders.
Modigliani and Miller Approach
M & M hypothesis is identical with the Net Operating Income approach if
taxes are ignored. However, when corporate taxes area assumed to exist, there
hypothesis is similar to the net income approach.
In the absence of taxes:
The theory proves cost capital is affected by the capital structure are say
that the debt- equity mix is irrelevant in the determination of the total value of a
firm. The reason argued is that though debt is cheaper to equity, with increased
use of debt as a source of finance, the cost of equity increases. This increase in
cost of equity offsets the advantage of the low cost debt. Thus, although the
financial leverage affects the cost of equity the overall cost of capital remains
constant. The theory emphasizes the fact that a firms operating income is a
determinant of its total value. The theory further propounds that beyond a certain
equity falls there by again balancing the two costs. In the opinion of Modigliani
& Miller , to identical firms in all respects except their capital structure cannot
have different values or cost of capital because of Arbitrage process. In case
two identical firms except for their capital structures have different market values
are cost of capital Arbitrage will take place and the investors will engage in
personal leverage, and this will again render the two firms to have the same total
value.

The M & M approach is based upon the following assumptions:
1. There are no corporate taxes.

2. Investors act rationally.
3. The expected earnings of all the firms have identical risk characteristics.
4. The cut-off point of investment in firm is capitalization rate.
5. Risk to investors depends upon the random fluctuations of expected
earnings and the possibilities that the actual value may turn out to be
different from their best estimate.

6. All earnings are distributed to the share holders.
When the corporate taxes are assumed to exist
M & M , in their article of 1963 have recognized that the value the firms
will increase or the cost of capital will decrease with the use of debt on account
of deductinility of interest charges for tax purpose. Thus , the optimum capital
structures can be achieved by maximizing the debt mix in the equity of a firm .
According to the M & M approach , the value of a firm unlevered can be
calculated as follows :
Value of unlevered firm (Vu)
= ( Earnings Before Interest & Tax ) / ( Overall cost of capital)
= (EBIT) * (1-t) /( Ko)
AND , the value of a levered firm is :
V1 = Vu + td
Where, Vu is value of a levered firm

And, t D is the discovered present value of the tax savings resulting from the tax
deductibility of the interest charges, t is the rate of the tax and D the quantum of
debt used in the mix.
Capital Structure Management
Capital Structure Management or planning the capital structure
Estimation of capital requirements for current and future needs is
important for a firm. Equally important is the determining of capital mix. Equity
and debt are the two principle sources of finance of a business. But, what should
be the proportion between debt and equity in the capital structure of a firm? how
much financial leverage should a firm employ? This is a very difficult question.
To answer this question, the relationship between the financial leverage and the
value of the firm or cost of capital has to be studied . Capital structure planning,
which aims at the maximization of profits and the wealth of the share holders,
ensures the maximum value of a firm or the minimum cost of capital . It is very
important for the financial manager to determine the proper mix of debt and
equity structure but in practice it is very difficult to design the optimal capital
structure. The management of a firm should try to reach as near as possible of the
optimum point of debt and equity mix.
Essential Features of a Sound Capital Mix
A sound or an appropriate capital structure should have the following features:
i. Maximum possible of leverage.

ii. The capital structure should be flexible.

iii. To avoid undue financial business risk with the increase of debt.
iv. It should involve minimum possible risk of loss of control.
CAPITAL GEARING
The term capital gearing refers to the relationship between equity capital
and long-term debt it may be planned or historically, the latte describing a state of
affairs where the capital structures an evolved over a period of time, but not
necessarily in the most advantages way. In simple words the capital gearing
means the ratio between the various types of securities in the capital structure of
the company. a company is set to be in high-gear , when it has a proportionately
higher / large in use of debentures and preference shares for raising the long-term
resources , where as low gear stands for a proportionately large issue of shares.
Significance of Capital Gearing
The problem of capital gearing is very important in a company. It has a
direct bearing on the divisible profits of a company and hence a proper capital
gearing is very important for smooth running of an enterprise. In case of low
geared company, the fixed cost of capital by way of fixed dividend on preference
shares and interest on debentures is low and the equity share holders may get a
higher rate of dividend. Whereas, in a high geared company the fixed cost of
capital is higher leaving lesser divisible profits for the equity share holders.
Capital gearing and trade cycles:
The technique of capital gearing can be successfully employed by a
company during various phases of trade cycles that is during the conditions of

inflation and deflation, to increase the rate of return to its owners and thereby
increasing the value their investments. The effect of capital gearing during
various phases of trade cycles is discussed below:
During inflation or boom period:
A company should follow the policy of high gear during inflation or boom
period as the profits of the company are the higher and it an easily preference
shares pay fixed costs of debentures and preference shares. By adoption the
policy of high gear, a company can increases its earnings per share and there by a
higher rate of dividend.
During the deflation or depression period:
During depression the rate of earnings of the company is lower than the
rate of interest/dividend on fixed interest bearing securities and hence it cannot
meet the fixed costs without low gearing the divisible profits and rate of
dividend. It is, therefore, better for a company to remain in low gear and not to
resort to fixed interest bearing securities as source of finance during such period.
Factors determining the capital structure
The capital structure of a firm depends upon a large number of factors
such as leverage or trading on equity, growth of the company, nature and size of
business, the idea of retaining control, flexibility of capital structure,
requirements of investors, costs of flotation of new securities, timing of issue,
corporate tax rate and the legal requirements. It is not possible to rank them

because of all such factors are of different importance and the influence of
individual factors of a firm changes over a period of time. Every time the funds
are needed, the financial manager has to study the pros and cons of the various
sources of finance so as to select the most advantageous capital structure.
The factors influencing the capital structure are as follows:
Financial Leverage or Trading on Equity:
The use of long-term fixed interest bearing debt and preference share
capital along with equity share capital is called financial leverage of trading on
equity. Effects of leverage on the shareholders return or earnings per share have
already been discussed in this chapter. The use of long-term debt increases
magnifies the earnings per share if the firm yields a return higher than the cost of
debt. The earnings per share also increase with the use of preference share capital
but due to the fact that interest is allowed to be deducted while computing tax, the
leverage impact of debt is much more.
Growth and Stability of Sales:
The capital structure of a firm is highly influenced by the growth and
stability of its sale. If the sales of a firm are expected to remain fairly stable, it
can raise a higher level of debt. Stability of sales ensures that the firm will not
face any difficulty in meeting its fixed commitments of interest repayments of
debt. Similarly, the rate of growth in sales also affects the capital structure
decision.

Cost of Capital:
Every rupee invested in affirms has a cost. Cost of capital refers to the
minimum return expected by its suppliers. The capital structure should provide
for the minimum cost of capital. The main sources of finance for a firm are
equity, preference share capital and debt capital. The return expected by the
suppliers of capital depends upon the risk they have to undertake. Usually, debt is
a cheaper source of finance compared to preference and equity capital due to
I. Fixed rate of interest on debt;

II. Legal obligation to pay interest;
III. Repayment of loan and priority in payment at the time of winding up of
the company.
Cash Flow Ability to Service Debit
A firm which shall be able to generate larger and stable cash inflows can
employ more debit in its capital structure as compared to the one which has
unstable and lesser ability to generate cash inflows. Debit financing implies
burden of fixed charge due to fixed payment of interest and the principal.
Whenever wants to raise additional funds, it should estimate, project in future
cash inflows to ensure to coverage of fixed charges.
Nature and Size of a Firm
Nature and size of a firm also influence its capital structure. A public
utility concern has different capital structure as compared to other manufacturing
concern. Public utility concern may employ more of debit because of stability and

regularity of their earnings . on the other hand , a concern which cannot provide
stable earnings due to the nature of its business will have to rely mainly on equity
capital ; similarly, small companies have to mainly upon owned capital as it is
very difficult for them to raise long term loans on reasonable terms and also can
issue equity and preference shares at case to the public.
Control
Whenever additional funds are required funds by a firm, the management
of the firm warns to raise the funds without any loss of control over the firm. In
case the funds are raised through the issue of equity shares, the control of the
existing share holders is diluted. Hence, they might raise additional funds by way
fixed interest bearing debit and preference share holders and debenture holders do
not have the voting rate. Hence, from the point of view of control, debit financing
is recommended.
Flexibility
Capital structure of a firm should be flexible, i.e., it should be such as to
be capable of being adjust according to the needs of changing conditions. It
should be possible to raise additional fund, whenever the need be, without much
of difficult and delay. A firm should arrange its capital structure in such a manner
that it can substitute on form financing by another. Redeemable preference shares
and convertible debentures may be preferred on flexibility.
Requirements of investors

The requirement of investors is another factor that influences the capital
structure of the firm. It is necessary to meet the requirements of both institutional
as well as private investors when debt financing is used. investors are generally
classified under three kinds, i.e., bold investors, cautious investors , less cautious
investors.
Assets Structure
The liquidity and the composition of assets should also be kept in mind
while selecting the capital structure. If fixed assets constitute a major portion of
the total assets of the company, it may be possible for the company to raise more
of long term debts
Cost of floatation
Although not very significant, yet cost of floatation of various kinds of
securities should be considered while raising funds. The cost of floating debt is
generally less than the cost of floating equity and hence it may persuade the
management to raise debt financing. The cost of floating as percentage to funds
decrease with the increase in the size of issue.
Profitability
The primary objective of a business undertaking is to earn profits.
Profit earning is considered essential for the survival of the business. In the
words of Lord Keynes, Profit is the engine that drives the business enterprise.
A business needs profits not only for its existence but also for expansion and

diversification. The investors want an adequate return on their investments. The
workers want higher wages, creditors want higher security for their interest and
loan and so on. A business enterprise can discharge its obligations to the various
segments of the society only through earning of profits. Profits are, thus, a useful
measure of overall efficiency of a business. Profits to the management are the
test of efficiency and measurement of control; to owners, a measure of worth of
their investment; to creditors, the margin of safety; to employees, a source of
fringe benefits; to Government, a measure of tax-paying capacity and the basis of
legislative action; to customers, a hint to demand for better quality and price cuts;
to an enterprise, less cumbersome source of finance for growth and existence and
finally to the country, profits are an index of economic progress profitability
ratios are calculated to measure the overall efficiency of the business.
They are mostly concerned with the question of how best to measure profitability.
This is an important question, but its very complexity a further question, namely
why analysis of profitability might be of interest to a competition authority, and
what kind of profitability analysis would interest that authority most. The
competition commissions Guidelines for Market Investigation References are-as
is frequently the case- particularly helpful in this respect.
Profits as a signal of competitive conditions in a market, and also about
profits as being an incentive. In this, it mirrors countless textbooks of economic
theory which talk about anticipated profits as the driving force which brings
people to market, and about realized profits as a signal which ought to lead to

longer run adjustments in market structure through entry and the expansion of
existing players. Further, it warns us not to look at profitability in isolation, but
only in the context of an overall assessment of the competitive conditions of the
market.
To say that profits are a signal is to assert that they contain useful
information that inferences can be made about underlying drivers of
competitiveness in a market from observable outcomes like profitability. This is,
in many ways, a backward looking exercise: its goal is to infer something about
what must have happened from what we observe to be its presumed consequence.
On the other hand, to say that profits are an incentive is to say that
they are a spur to action, that they may affect the conduct of firms in a market and
can do so in a way that affects further profit outcomes. This, by contrast, is a
more forward looking exercise: we infer what will happen in the future by
looking at the profit incentives currently facing players in a market.
Profits play two roles in the analysis of market dynamics. These are
backward looking and forward looking profit analysis.Backward looking
profitability analysis, which uses observed profits as a possible indicator of how
competitive market conditions actually are, and forward looking profitability
analysis which explores what might happen in a market in certain circumstances.
Backward looking profitability analysis often plays a role in the market

Investigation undertaken by the competition commission, but it is not
often significant in merger analysis; forward looking profitability analysis can
and often does- play a role in both, but one often finds it to be a central feature of
merger analyses.
Measures
profitability in terms of total investments

Profitability in terms of Sales
Profitability in terms of shareholders and investment
Profitability from creditors point of view
Profit just does not happen. They must be procured. There is no guarantee of
profit production in any particular volume of goods and services.
In other words, profit planning aids in acquiring men, materials methods,
machines and money in advance. In order to numerous the profit plans, a master
plan is prepared. It summarizes the objectives of all departments and submits of
an organization
Profit is the positive and fruitful difference between total revenue
and total expenses over a period of time the wordPROFIT has been viewed in a
number of ways the meaning PROFIT differ according to use and purpose of the
figures. In the view of financial management, profits are the test of efficiency and
measure in control.
Profitability:

It is measure 0f the amount by which a companys revenues exceeds its relevant
expenses. The profit of a business is the difference between its revenues and its
cost. It is a important to consider two main types of profit using this profitability
calculations you are to compare business profits in one year compared with
others , and also compare the profitability of sufficient business. Another
important measure of how well a business is being run is how liquid it is. To do
this you need to look at the current assets and current liabilities in the balance
sheet. The profitability ratios are the basic bank financial ratios. Profitability
ratios are the financial statements ratios which focus on how well a business is
performing in terms of profit. Profitability ratios serve as overall measures of the
effectiveness of the firms management relative to sales and/or to investment.
Examples of profitability ratios include the net profit margin, return on total
assets, operating profit margin, operating income return on investment, and on
common equity.
Calculating Profitability ratio:
Corporate earnings are important to you as an investor. If you compare corporate
earnings of prospective investments, you will make wiser investment you will
make wiser investment decisions. Profitability ratios provide you with tools you
can use to make these comparisons. Fundamental analysis is a method used to
evaluate the worth of a security by studying the financial data of the issuer.

Performing fundamental analysis will teach you a lot about a company, but
virtually nothing about how it will perform in the stock market. Apply this
analysis on two competing companies and it becomes clearer which the better
investment choice is. In this section you will learn to use some of the tools of the
fundamental analyst. As an investor, you are interested in corporations earnings
because earnings provide you with potential dividends and growth. Companies
with greater earnings provide you with potential dividends and have greater
potential. Profitability ratios are measures of performance showing how much the
film is earning compared to its sales, assets are equity you can quickly see the
difference in profitability between two companies the profitability ratios each.
1.2 INDUSTRY PROFILE
India with 185 million cows and 154 million buffaloes. Have the
largest population cattle in the world. Total cattle population in the country as on
October 2012 stood at 339 million. More than 50% of buffaloes and 20% of cattle

in the world are found in India and most of these are milk cows and milk
buffaloes.
Indian dairy sector contributes a large share in agriculture gross
domestic products. Presently there are around 70,000 village dairy cooperatives
across the country. The cooperative societies are federated into 170 district milk
producers unions, which in turn have 22 state cooperative dairy federations. Milk
production gives employment to more leading producer of milk in the world
followed by USA. The milk production in 1999-00 estimated at 78 million metric
tons as compared expected to increase to 81 million metric tons by 2000-01. Of
this total produce of 78 million cows milk constitute 6 million metric tones while
rest is from other.
While world milk production declined by 2% up last three years,
according to FAC estimates. Indian production has increased by 4%. The milk
production in India accounts for more than 13% of the total world output and
57% of total Asias production. The top view milk producing nations in the world
are idea, USA, Russia, Germany and France.
Although milk production has grown at a fast pace during the last three
decades milk yield per animal is very low. The main reasons for the low yield are:
1 Lack of use of scientific practices in milking.

2 Inadequate availability of fodder in all seasons.
3 Non-availability of veterinary health services.
INDIA: world largest milk producer

India has become the worlds no.1 milk producing country. United States
where the milk production is anticipated to grow only marginally at 71 million
tones, occupied the slot till 1997. In the year 1997, Indias milk production was
on par with the U.S at 71 million tones.
Indias annual milk production has more than trebled in the last 30 years,
rising from 21 million tones in 1968 to an anticipated 80 million tones in 2001.
This braid growth and modernization is largely credited to contribution of dairy
cooperatives, under the operation flood (of) project, assisted by many multi-
lateral agencies, including the European union the world bank in the Indian
context of poverty and malnutritions, milk has a special role to play for its man
notional advantages as well as providing supplementary income to some 79
melon farmers in over 500,000 remote villages.
MARKET SIZE AND GROWTH
Market size for milk (sold in loss/packaged from) is estimated to be 36
million metric tones valued at Rs.470 billion; the market is currently growing at
round 4% per annum in volume terms. The milk surplus states in India are Uttar
Pradesh, Punjab, Haryana, Rajasthan, Gujarat, and Maharashtra, Andhra Pradesh,
Karnataka and Tamil nadu. The manufacturing of milk products is concentrated
in these milk surplus states. The top 6 states viz.

Uttar Pradesh, Punjab, Madhya Pradesh, Rajasthan, Tamil nadu and Gujarat
together account for 58% of national production.
Milk production grew by a mere 1% per annum, between 1947 and 1970. Since
the early 70's under operation flood, production growth increased significantly
averaging over 5% per annum.
About 75% of milk is consumed at the household level, which is not a part
of commercial dairy industry. Loose milk has a larger market in India as it is
perceived to be fresh by most consumers. It poses a higher risk of adulteration
and contamination.
The production of milk products, that is milk products including infant milk
food, malted food, condensed milk and cheese stood at 3.07 lacks metric tones in
1999. Production of milk powder including infant milk food has risen to 2.25lkh
metric tone in 1999, where as that puff-malted food is at 65,000 metric tones
cheese and condensed milk production stands at 5000 and 11000 metric tone
respectively in the same year.
MAJOR PLAYERS:
The packaged milk segment is dominated by the dairy cooperatives. Gujarat
cooperative milk Marketing Federation (GCMMF) is the largest player. All other
local dairy cooperatives have their local brands (for e.g. Gokul, Warana in
Maharashtra, sarasin Rajasthan, verka in Punjab, Vijaya in Andhra Pradesh,
Aavin in Tamil Nadu, etc.)

Other private players include J.K.Dairy, Heritage Foods, Indian Dairy, and
Dairy Specialties etc. Amrut industries, once a leading player in the sector has
turned bankrupt and in facing liquidation.
EXPORT POTENTIAL
India has the potential to become one of the leading players in milk product
exports.
LOCATION ADVANTAGE
India is located amidst major milk deficit countries in Asia and Africa. Major
importers of milk and milk products are Bangladesh,
China, Hong Kong, Singapore, Thailand, Malaysia, Philippines, Japan UAD,
Oman and other gulf countries, all located close to India.
CONCERNS IN COMPETITIVENESS ARE
QUALITY
Significant investment has to be made in milk procurement equipment,
chilling and refrigeration facilities. Also, training has to be imparted to improve
the quality to bring it up to international standards.
PRODUCTIVITY
To have an exportable surplus in the long term and also to maintain cost
competitiveness, it is imperative to improve productivity of Indian cattle.

FOREIGN COLLABORATION IN INDIA
The liberalization of the Indian economy in 1991 has attracted multinational
dairy enterprises in hundreds. Specialty dairy products like cheese; casein,
lactose and multinational corporations are now manufacturing whey proteins in
India. The advent of foreign brands produced in India is changing the profile in
the national dairy industry.
PACKAGING TECHNOLOGY
The local milkman initially sold milk door to door. When the diary
cooperatives initially started marketing branded milk, it was sold in glass bottles
sealed with foil. Over the years several developments in packaging media have
taken place. In the early 80s plastic pouches replaced the bottles. Plastic
pouches made transportation and storage very convenient, besides reducing costs.
Mild packed in plastic pouches/bottles have a shelf life of just 1-2 days, that too
only if refrigerated.
FUTURE PROSPECTS
Indias dairy sector is expected to triple its production in the next 10 years in
view of expanding potential for export to Europe and the West. Moreover with
WTO regulations expected to come into force in coming years all the developed
countries which are among big exporters today would are the withdraw the
support and subsidy to their domestic milk products sector.
History

Milk producing animals have been domesticated for thousands of years.
Initially, they were part of the subsistence farming that nomads engaged in. As
the community moved about the country, their animals accompanied them.
Protecting and feeding the animals were a big part of the symbiotic relationship
between the animals and the herders.
In the more recent past, people in agricultural societies owned dairy
animals that they milked for domestic and local (village) consumption, a typical
example of a cottage industry. The animals might serve multiple purposes (for
example, as a draught animal for pulling a plough as a youngster, and at the end
of its useful life as meat). In this case the animals were normally milked by hand
and the herd size was quite small, so that all of the animals could be milked in
less than an hourabout 10 per milker. These tasks were performed by
a dairymaid (dairywoman) ordairyman. The word dairy harkens back to Middle
English dayerie, deyerie, from deye (female servant or dairymaid) and further back to
Old English dge (kneader of bread).
With industrialisation and urbanisation, the supply of milk became
a commercial industry, with specialised breeds of cattle being developed for
dairy, as distinct from beef or draught animals. Initially, more people were
employed as milkers, but it soon turned to mechanisation with machines designed
to do the milking.
However, there are claims that this practice can have negative consequences
for the animals themselves. A European Union scientific commission was asked
to report on the incidence of mastitis and other disorders in dairy cows, and on
other aspects of the welfare of dairy cows The commission's statement,
subsequently adopted by the European Union, stated that the use of rBST
substantially increased health problems with cows, including foot problems,
mastitis and injection site reactions, impinged on the welfare of the animals and
caused reproductive disorders. The report concluded that on the basis of the
health and welfare of the animals, rBST should not be used. Health
Canada prohibited the sale of rBST in 1999; the recommendations of external
committees were that, despite not finding a significant health risk to humans, the
drug presented a threat to animal health and, for this reason, could not be sold
in Canada.
Structure of the industry
While most countries produce their own milk products, the structure of the
dairy industry varies in different parts of the world. In major milk-producing
countries most milk is distributed through wholesale markets. In Ireland and
Australia, for example, farmers' co-operatives own many of the large-scale
processors, while in the United States many farmers and processors do business
through individual contracts.
In the United States, the country's 196farmers' cooperatives sold 86% of
milk in the U.S. in 2002, with five cooperatives accounting for half that. This was
down from 2,300 cooperatives in the 1940s. In developing countries, the past

practice of farmers marketing milk in their own neighborhoods are changing
rapidly. Notable developments include considerable foreign investment in the
dairy industry and a growing role for dairy cooperatives. Output of milk is
growing rapidly in such countries and presents a major source of income growth
for many farmers
Government intervention in milk markets was common in the 20th century. A
limited anti-trust exemption was created for U.S. dairy cooperatives by the
Capper-Volstead Act of 1922. In the 1930s, some U.S. states adopted price
controls, and Federal Milk Marketing Orders started under the Agricultural
Marketing Agreement Act of 1937 and continue in the 2000s. The Federal Milk
Price Support Program began in 1949. The Northeast Dairy Compact regulated
wholesale milk prices in New England from 1997 to 2001.
Operation of the Dairy Form
When it became necessary to milk larger numbers of cows, the cows would
be brought to a shed or barn that was set up with bails (stalls) where the cows
could be confined while they were milked. One person could milk more cows this
way, as many as 20 for a skilled worker. But having cows standing about in the
yard and shed waiting to be milked is not good for the cow, as she needs as much
time in the paddock grazing as is possible. It is usual to restrict the twice-daily
milking to a maximum of an hour and a half each time. It makes no difference
whether one milks 10 or 1000 cows, the milking time should not exceed a total of
about three hours each day for any cow.

As herd sizes increased there was more need to have efficient milking
machines, sheds, milk-storage facilities (vats), bulk-milk transport and shed
cleaning capabilities and the means of getting cows from paddock to shed and
back.
Farmers found that cows would abandon their grazing area and walk
towards the milking area when the time came for milking. This is not surprising
as, in the flush of the milking season, cows presumably get very uncomfortable
with udders engorged with milk, and the place of relief for them is the milking
shed.
Cream and butter
Today, milk is separated by huge machines in bulk into cream and skim
milk. The cream is processed to produce various consumer products, depending
on its thickness, its suitability for culinary uses and consumer demand, which
differs from place to place and country to country.
Some cream is dried and powdered, some is condensed (by evaporation)
mixed with varying amounts of sugar and canned. Most cream from New Zealand
and Australian factories is made into butter. This is done by churning the cream
until the fat globules coagulate and form a monolithic mass. This butter mass is
washed and, sometimes, salted to improve keeping qualities. The

residual buttermilk goes on to further processing. The butter is packaged (25 to
50 kg boxes) and chilled for storage and sale. At a later stage these packages are
broken down into home-consumption sized packs.
Skimmed milk
The product left after the cream is removed is called skim, or skimmed milk.
To make a consumable liquid a portion of cream is returned to the skim milk to
make low fat milk (semi-skimmed) for human consumption. By varying the
amount of cream returned, producers can make a variety of low-fat milks to suit
their local market. Other products, such as calcium, vitamin D, and flavoring are
also added to appeal to consumers.
Casein
Casein is the predominant phosphoprotein found in fresh milk. It has a
very wide range of uses from being filler for human foods, such as in ice cream,
to the manufacture of products such as fabric, adhesives, and plastics.
Cheese
Cheese is another product made from milk. Whole milk is reacted to
form curds that can be compressed, processed and stored to form cheese. In
countries where milk is legally allowed to be processed without pasteurisation a
wide range of cheeses can be made using the bacteria naturally in the milk. In
most other countries, the range of cheeses is smaller and the use of artificial

cheese curing is greater. Whey is also the byproduct of this process. Some people
that are lactose intolerant can eat certain types of cheese.
Whey
In earlier times whey was considered to be a waste product and it was,
mostly, fed to pigs as a convenient means of disposal. Beginning about 1950, and
mostly since about 1980, lactose and many other products, mainly food additives,
are made from both casein and cheese whey.
Yogurt
Yogurt (or yoghurt) making is a process similar to cheese making, only the
process is arrested before the curd becomes very hard.
Milk powders
Milk is also processed by various drying processes into powders. Whole milk,
skim milk, buttermilk, and whey products are dried into a powder form and used
for human and animal consumption. The main difference between production of
powders for human or for animal consumption is in the protection of the process
and the product from contamination. Some people drink milk reconstituted from
powdered milk, because milk is about 88% water and it is much cheaper to
transport the dried product.
Other milk products

Kumis is produced commercially in Central Asia. Although it is
traditionally made from mare's milk, modern industrial variants may use cow's
milk instead.
Transport of milk
Historically, the milking and the processing took place in the same place: on
a dairy farm. Later, cream was separated from the milk by machine, on the farm,
and the cream was transported to a factory for butter making. The skim milk was
fed to pigs. This allowed for the high cost of transport (taking the smallest
volume high-value product), primitive trucks and the poor quality of roads. Only
farms close to factories could afford to take whole milk, which was essential for
cheese making in industrial quantities, to them.
Originally milk was originally distributed in 'pails', a lidded bucket with a handle.
These proved impractical for transport by road or rail, and so the milk churn was
introduced, based on the tall conical shape of the butter churn. Later large railway
containers, such as the Wagon were introduced later, enabling the transport of
larger quantities of milk, and over longer distances.
The development of refrigeration and better road transport, in the late 1950s,
has meant that most farmers milk their cows and only temporarily store the milk
in large refrigerated bulk tanks, from where it is later transported by truck to
central processing facilities.
In many European countries, particularly the United Kingdom, milk is then
delivered direct to customers' homes by a milk float.

Milking machines
Milking machines are used to harvest milk from cows when manual milking
becomes inefficient or labour intensive. One early model was patented in
1907. The milking unit is the portion of a milking machine for removing milk
from an udder. It is made up of a claw, four teatcups, (Shells and rubber liners)
long milk tube, long pulsation tube, and a pulsator. The claw is an assembly that
connects the short pulse tubes and short milk tubes from the teatcups to the long
pulse tube and long milk tube. (Cluster assembly) Claws are commonly made of
stainless steel or plastic or both. Teacups are composed of a rigid outer shell
(stainless steel or plastic) that holds a soft inner liner or inflation. Transparent
sections in the shell may allow viewing of liner collapse and milk flow. The
annular space between the shell and liner is called the pulse chamber.
Temporary milk storage

Milk coming from the cow is transported to a nearby storage vessel by the
airflow leaking around the cups on the cow or by a special "air inlet" (5-10 l/min
free air) in the claw. From there it is pumped by a mechanical pump and cooled
by a heat exchanger. The milk is then stored in a large vat, or bulk tank, which is
usually refrigerated until collection for processing.
Waste disposal

In the associated milk processing factories, most of the waste is washing
water that is treated, usually by composting, and returned to waterways. This is
much different from half a century ago, when the main products were butter,
cheese and casein, and the rest of the milk had to be disposed of as waste
(sometimes as animal feed).
In areas where cows are housed all year round, the waste problem is difficult
because of the amount of feed that is brought in and the amount of bedding
material that also has to be removed and composted.
Associated diseases
Leptospirosis is one of the most common debilitating diseases of milkers,
made somewhat worse since the introduction of herringbone sheds, because
of unavoidable direct contact with bovine urine
Cowpox is one of the helpful diseases; it is barely harmful to humans and
tends to inoculate them against smallpox.
Tuberculosis (TB) is able to be transmitted from cattle mainly via milk
products that are unpasteurized. TB has been eradicated from many countries
by testing for the disease and culling suspected animals.
Concerns
Health
Dairy can cause health issues for individuals who have lactose intolerance or
a milk allergy.

Vegan advocates, such as John A. McDougall, Caldwell Esselstyn, Neal D.
Barnard, Dean Ornish, Michael Greger, and T. Colin Campbell, have argued that
high animal fat and protein diets, such as the standard American diet, are
detrimental to health, and that a low fat vegan diet that may both prevent and
reverse degenerative diseases such as coronary artery disease and diabetes.
1.3 COMPANY PROFILE
INTRODUCTION:
SHIVASHAKTHI DAIRY PVT.LTD. Was started in the year 1990 by
Dr.P.RAMACHANDRA REDDY M.L.A. The managing director of the
Shivashakthi Dairy pvt.ltd was P.MIDHUN REDDY M.B.A. SHIVA SHAKTHI
DAIRY PVT. LTD. Was situated in Sadum Mandal, Chittoor (D.t), Andhra
Pradesh. An area where basic raw material milk is available in plenty. The main
function of the company is to procure the milk (raw) in and around Sadum taluk
and process the milk at factory, pack the processed milk and supply in to the
Chennai and Bangalore cities.
The product range of the company is
1. Milk (toned, full cream milk)
Toned Milk which is having 3% fat and have 8.55 of SNF (solid not fat)
which is available at 18 Rs. Per.ltr.
Full cream milk which is having 6.5% fat and have 9% of SNF (solid not fat)
which is available at 22 Rs. Per.ltr.
2. Cream
3. Ghee
SHIVASHAKTHI DAIRY PVT. LTD. enjoys excellent reputation as a fair and
reliable of raw milk from dairy farmers.
QUALITY CONTROL:
The most significant aspect of Shivashakthi dairy is its quality products
reflecting its sound quality functions. It has well equipped laboratory with the
sound work culture. Recognizing quality as they key to prosperity the dairy has

laid specific emphasis on quality control operates with major functions like
assessing commercial quality, minimizing spoilages ensuring quality conformity
milk and milk products, exercising process controls, assessing sanitation, status
of equipment, inspection of additives formulation of standards and inspections of
packaging materials, developing test methods, stability and accelerated tests for
quality guarantee of the products and review of market complaints for improving
the production practices.
Procurement
SivaShakthi
Production Dairy promotion
Pvt.Ltd.
Processing
SHIVASHAKTHI DAIRY PVT LTD FOUR PS OF PROFITABLE

DAIRY:
Procurement
Production

Processing
Promotion
Procurement:
Procurement covers collection of milk from rural producers or contractors,
including setting up of chilling centers. Provisions of laboratory equipment and
supplies milk vending machines, cattle welfare including feeding and fodder and
transportation.
Production:
Promotion includes activities of producing various types of liquid milk. The
conventional whole toned and standardized as well as innovative like extra,
nutrition for school children, pregnant mothers, the aged and infirm, low fat for
the calorie conscious.

Processing:
Processing products includes that the collected milk is stored and after
storing the milk is converted in to toned milk and full cream milk, ghee and
cream is made from the milk in the dairy.
Promotion:
Promotion covers activities like brand promotion setting by dairy parlors,
buying milk in bulk and repacking to self, distribution, which will result in
building and image either nationally and regionally.
PRODUCT PROFILE
The milk sold in the market as buffaloes milk is often mixed with cows milk,
buffaloes milk has portion of total solid and fats and then cows milk and admits
of large dilution with water. So highly rich in fat contents.
TYPES OF MILK
According to quality (fat) we can divide in to three types of milk they are.
1 Toned milk ,which is having 3%fat and have 8.5% of SNF(solid not fat)
which is available at Rs;18 per.ltr.

2 Full cream milk which is having 6.5% fat and have 9% of SNF which is
available at Rs;22 per. lit.

3 Skimmed milk which is having 05 fat and have 6% of SNF which is available
at Rs;12 per.ltr.
4 THE SHIVASHAKTHI DAIRY LTD HAS THREE PRODUCTS

1. Milk (toned full cream, skim)
2. Cream
3. Ghee
Competitors for shiva shakthi dairy pvt.ltd.
1. Nandini
2. Heritage
3. Dodla
4. Sangam
5. Tirumala.

2.0 RESEARCH METHODOLOGY
Research methodology is away to systematically solve the research
problem. it may be understood as a science of studying how research is done
scientifically.
2.1 NEED OF THE STUDY
Capital structure decision is one of the important decision taken by finance
manager. In this decision, the manager will decide about the components of
capital structure, proportion of each element of capital structure and total size of
the capital structure. The profitability of a company depends upon the size and
volume of the capital structure
2.2 Objectives of the Study

The objectives are geared towards the following:
To know the profitability of the form by using different ratios.
To find out the relationship between capital structure and profitability.
To find an optimal capital structure that would be associated with the best
performance.
2.3Sources of data

The data relating to financial statements of Shivasekthi Dairy Pvt. Ltd ltd and
information relating to capital structure ANALYSIS has been collected using
primary and secondary means.
Primary data
Primary data is being collected from various accounting offices and other
administrative offices while interacting with them in the plant.
Secondary data
The study is mainly based on the secondary data collected from the records and
the annual reports of Shivasekthi Dairy Pvt. Ltd and various books on accounting
and finance. Data relation to the financial statements of Shivasekthi Dairy Pvt.
Ltd ltd HAS been collected from the published annual reports which were
obtained from the administrative office.
2.4 Period of study

The capital structure and profitability is done through the financial statements
published by the SS mills for 2011-2012, 2012-2013, 2013-2014, 2014-2015,
2015-2016 financial years.
2.5 Statement of the Problem
Capital structure can affect the value of the company by affecting either its
expected earnings or the cost of the capital. To maximize the firm should select a
appropriate capital structure.

So this study is undertaken to know how the company design the capital
structure profitability.
2.6Hypothesis of the Study
The following hypotheses were formulated for the study.
There is a significant negative relationship between Debt
to equity and Net profit.

to equity and Return on Capital Employed.

There is a significant negative association between Debt to
equity and Return on Equity..

to total funds and Net profit.

to total funds and Return on Capital Employed.

There is significant negative association between Debt to
total funds and Return on Equity
2.7 Tools of the Data

The financial study made in Shivashakthi Dairy Pvt. Ltd comprises of the
capital structure, capital gearing has been clearly depicted by different attractive
charts like line charts, pyramid charts, scatter charts with straight lines, area
charts and cone charts.

2.7.1FINANCIAL TOOLS & ANALYSIS

Ratios
The ratios that are calculated can be called accounting ratio or financial
ratios as it is used and related to financial statement analysis. Ratios indicate a
quantitative relationship, which the analyst must use to make a qualitative
judgment about operational performance of an organization. To study
creditworthiness of the firm select a set of ratios that indicate firms state of
liquidity, profitability, asset management and debt position. While selecting
figures for calculating ratios one must be careful and see that these figures are
connected with each other. It is always better to compare ratios of current year
with that of past years. So the ratios that each group of people chooses to
examine will depend upon the nature of the groups interest in the firm. Some
times, ratios can be calculated from proforma financial statements. These ratios
an be compared with past ratios to know the relative strenghs and weaknesses in
the past and future.
The profitability has to reveal ability of the firm to earn
profitts(profit+ability) which is depent upon.
Utilization of resources
Margin between sales revenue and cost of production.
There are two major objectives in calculating the ratios below. They are
To know the financial position of the organization

To know the profitability of the firm.
Debt equity ratio
This is also called as leverage ratio. This ratio would establish
relationship between borrowed capital and own capital. It is to measure the
proportion of borrowed capital in the total capital invested. The ratio shows the
risk assumed by the company. If the ratio is high risk is high. A high ratio
indicated that firm has more borrowed capital than own capital. A high ratio
increased the firms obligation of interest payment. It indicates that firm is very
aggressive.
The debt equity ratio is generally calculated as follows:
Long term borrowed capital

D/E ratio = Shareholde r ' s funds
Interest coverage ratio
This ratio establishes relationship between operating income/profit or
EBIT and interest payable annually. This ratio measures the number of times
interest is coverd by the profit available for the payment of interest. Since interet
is paid out of operating profit(EBIT)it is essential to relate them to measure the
degree of risk in the payment of interest. This ratio is calculated as follows:

Interest cov Profitability Ratio:

The profitability ratios of a business concern can be measured by the
profitability ratios. These ratios highlight the end result of business activities by
which alone the overall efficiency of a business unit can be judged. (E.g.) gross
Profit ratios, Net profit ratios.
Profitability Ratio:
The profitability ratios of a business concern can be measured by the
profitability ratios. These ratios highlight the end result of business activities by
which alone the overall efficiency of a business unit can be judged. (E.g.) gross
Profit ratios, Net profit ratios.
Net Profit Ratio:

Net profit ratio establishes a relationship between net profit (after taxes)
and sales. It is determined by dividing the net income after tax to the net sales for
the period and measures the profit per rupee of sales
Net profit
Net profit Ratio = Net sales 100
Operating ratio:
The operating ratio is determined by comparing the cost of the
goods sold and other operating expenses with net sales.

0perating ratio =
Cost of goods sold+Operating expenses

Net sales 100
Operating profit ratio:
Operating profit takes into account the cost of product or services, such as
overhead and administrative expenses. It is calculated by dividing operating
profit by net sales and multiplying by 100.
Operati ng profit
Operating profit ratio = Net sales 100
Debt ratio:
Debt ratio (also known as debt to assets ratio) is a ratio which measures
debt level of a business as a percentage of its total assets. It is calculated by
dividing total debt of a business by its total assets.
Debt ratio is calculated using the following formula:
Total Debt
Debt Ratio = Total Assets
Return on equity ratio:

Return on equity (ROE) is the amount of net income returned as a
percentage of shareholders equity. Return on equity measures a corporation's
profitability by revealing how much profit a company generates with the money
shareholders have invested.
ROE is expressed as a percentage and calculated as:
Net Income
Return on Equity = Shareholder ' s Equit
Return on investment:
Return on investment, or ROI, is the ratio of a profit or loss made in a fiscal
year expressed in terms of an investment and shown as a percentage of increase
or decrease in the value of the investment during the year in question.
The basic formula for ROI is:
Net Profit
ROI = Total Investment * 100
Percentage of owned and borrowed funds in total investment
Net worth
Percentage of owners funds = Net worth+Total deb t 100
2.7.2STATISTICAL TOOLS
Arithmetic Mean:
The arithmetic mean, also called the average or average value, is the
quantity obtained by summing two or more numbers or variables and then
dividing by the numbers of variables. The arithmetic mean is important in
statistics.
( X )
Arithmetic Mean X= N
Standard deviation:
The standard deviation is a numerical value used to indicate how
widely individuals in a group vary. If individual observations vary greatly from
the group mean, the standard deviation is big; and vice versa.
( xx )2

SD =

Correlation analysis
Correlation is concern describing the strength of rela Correlation
analysis was carried out to identify the relationship between capital structure and
profitability. Here capital structure is the independent variable and profitability is
the dependent variable. From these independent and dependent variables, the

following relationship is formulated. Profitability of the banks is dependent upon
the capital structure.
P = f (CS)
Which shows profitability is the function of capital structure.
P = Profitability
CS = Capital Structure
XY
r =
X 2 Y 2
Co-efficient of Correlation:
Correlation is the relationship between
variables, coefficient sometimes referred to as the person

product movement correlation coefficient r=
x X

y Y2

X ) ( yY )
( x

2.8 LIMITATION OF THE STUDY:
This study was done only by secondary data collected from financial
statements of this company during the period of 2010-2016 and primary data
were not included in this research .therefore, the quality of the study depends
purely upon the accuracy, reliability and quality of the secondary data source.
1. The period considered for the study is the last 5 yearsfinancial
statement only. So it is not possible to find out the life time
performance of the company.
2. Figures are rounded off whenever it was necessary.

3. The study is made exclusively on the financial aspects of the
company.
3.0 DATA ANALYSIS AND INTERPRETATION
3.1 Debt equity ratio:
Long term borrowed capital

D/E ratio = Shareholde r ' s funds
3.1 TABLE DEBT EQUITY RATIO
YEAR TOTAL SHARE HOLDERS DEBT EQUITY

LIABILITIES FUNDS RATIO%
2011-12 1688.3 365.84 4.62
2012-13 1782.35 392.48 4.54
2013-14 1648.85 453.69 3.63
2014-15 1700.16 451.04 3.77
2015-16 1704.54 596.07 2.86
SOURCE: Data Compiled from the annual reports of SS DAIRY PVT LTD
3.1 GRAPH DEBT EQUITY RATIO

DEBT EQUITY RATIO%

5 4.62 4.54
R 3.63 3.77
4
A 2.86
3
T
I 2
O 1
S 0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
YEARS
INTERPRETATION
It shows that table 3.1 Debt Equity Ratio during the year 2011-16 it shows 2011-
2012 is 4.62,in the year 2012-2013 the Debt Equity ratio was decreased is 4.54,
in the year 2013-2014 the Debt Equity ratio was decreased is 3.63,in the year
2014-2015 Debt Equity ratio was increased is 3.77,in the year 2015-2016 Debt
Equity ratio was decreased is 2.86. It is found from the study that, the majority
(4.62) Debt Equity ratio is more in the year 2011-2012.
3.2NETPROFIT RATIO:
Net profit
Net profit Ratio = Net sales 100
3.2 TABLE NETPROFIT RATIO
YEAR NETPROFIT NETSALES NET PROFIT RATIO

2011-12 -55.07 818.34 -6.77
2012-13 -34.77 833.43 -4.17
2013-14 -159.38 704.61 -22.62
2014-15 -87.42 1168.25 -7.48
2015-16 -47.72 1092.31 -4.37
3.2 GRAPH NEETPROFIT RATIO

NET PROFIT RATIO

0
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
R -5
A -4.17 -4.37
-6.77 -7.48
T -10
I -15
O
S -20
-25 -22.62
YEARS
NET PROFIT RATIO
INTERPRETATION
It shows that table 3.2 Net profit Ratio during the year 2011-16 it shows 2011-
2012 is -6.77,in the year 2012-2013 Net profit ratio was increased is -4.17, in the
year 2013-2014 the Net profit ratio was decreased is -22.62,in the year 2014-
2015 Net profit ratio was increased is-7.48,in the year 2015-2016 Net profit ratio
was increased is -4.37. It is found from the study that, the majority (-4.17) Net
profit ratio is more in the year 2013-2014.
3.3 OPERATING RATIO:
Operating ratio =
Cost of goods sold+Operating expenses
Net sales 100
3.3 TABLE OPERATING RATIO
YEAR OPERATING NETSALES OPERATING

EXPENSES RATIO%
2011-12 171.84 818.34 21.00
2012-13 149.80 833.43 17.97
2013-14 77.69 704.61 11.03
2014-15 112.99 1168.25 9.67
2015-16 109.09 1092.31 9.99

3.3 GRAPH OPERATING RATIO
OPERATING RATIO%
R 30
21
A 20 17.97
T 11.03 9.67 9.99
I 10
O
0
S 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
YEARS
OPERATING RATIO%
INTERPRETATION
It shows that table 3.3 Operating Ratio during the year 2011-16 it shows 2011-
2012 is 21.00,in the year 2012-2013 Operating ratio was decreased is 17.97, in
the year 2013-2014 the Operating ratio was decreased is 11.03,in the year 2014-
2015 Operating ratio was decreased is 9.67,in the year 2015-2016 Operating ratio
was increased is 9.99. It is found from the study that, the majority (21.00)
Operating ratio is more in the year 2011-2012.
3.4OPERATING PROFIT RATIO:
Operating profit
Operating profit ratio = Net sales 100
3.4 TABLE OPERATING PROFIT RATIO
YEAR OPERATING NETSALES OPERATING

PROFIT PROFIT RATIO%
2011-12 646.50 818.34 79.00
2012-13 683.63 833.43 82.03
2013-14 626.92 704.61 88.97

2014-15 1055.26 1168.25 90.33

2015-16 983.22 1092.31 90.01
3.4 GRAPH OPERATING PROFIT RATIO
OPERATING PROFIT RATIO%

95 90.33 90.01
R 88.97
90
A
85 82.03
T 79
I 80
O 75
S 70
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
YEARS
OPERATING PROFIT RATIO%
INTERPRETATION
It shows that table 3.4 Operating Profit Ratio during the year 2011-16 it shows
2011-2012 is 79.00,in the year 2012-2013 Operating Profit ratio was increased is
82.03, in the year 2013-2014 the Operating Profit ratio was increased is 88.97,in
the year 2014-2015 Operating Profit ratio was increased is 90.33,in the year
2015-2016 Operating Profit ratio was decreased is 90.01. It is found from the
study that, the majority (90.33) Operating Profit ratio is more in the year 2014-
2015.
3.5DEBT RATIO:
Total Debt
Debt Ratio = Total Assets
3.5 TABLE DEBT RATIO
YEAR TOTAL DEBT TOTL ASETS DEBT RATIO%
2011-12 1688.83 2054.67 0.82

2012-13 1782.35 2174.84 0.82

2013-14 1648.85 2102.53 0.78
2014-15 1700.16 2188.01 0.78
2015-16 1704.54 2300.61 0.74
3.5 GRAPH DEBT RATIO
DEBT RATIO%
0.84 0.82 0.82
0.82
R
A 0.8 0.78 0.78
T 0.78
I 0.76 0.74
O 0.74
S 0.72
0.7
2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
YEARS
DEBT RATIO%
INTERPRETATION
It shows that table 3.1 Debt Ratio during the year 2011-16 it shows 2011-2012 is
0.82,in the year 2012-2013 the Debt ratio was constant is 0.82, in the year 2013-
2014 the Debt ratio was decreased is 0.78,in the year 2014-2015 Debt ratio was
constant is 0.78,in the year 2015-2016 Debt ratio was decreased is 0.74. It is
found from the study that, the majority (0.82) Debt Equity ratio is more in the
years 2011-2012 and, 2012-2013.
3.6RETURN ON EQUITY RATIO
Net Income
Return on Equity = Shareholder ' s Equit
3.6 TABLE RETURN ON EQUITY RATIO
YEAR NET INCOME SHAREHOLDERS RETURN ON

EQUITY EQUITY RATIO
%
2011-12 -75.24 365.84 -0.21
2012-13 -49.38 392.48 -0.13
2013-14 -234.38 453.64 -0.52
2014-15 -117.48 487.85 -0.24
2015-16 -53.50 596.07 -0.09
3.6 GRAPH RETURN ON EQUITY RATIO
RETURN ON EQUITY RATIO%

0
R
-0.1 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
A -0.09
-0.2 -0.13
T -0.21
-0.3 -0.24
I
-0.4
O
-0.5
S
-0.6 -0.52
YEARS
RETURN ON EQUITY RATIO%
INTERPRETATION
It shows that table 3.6 Return On Equity Ratio during the year 2011-2012 is
-0.21,in the year 2012-2013 the Return On Equity ratio was increased is -0.13, in
the year 2013-2014 the Return On Equity ratio was decreased is -0.52,in the year
2014-2015 Return On Equity ratio was increased is -0.24,in the year 2015-2016
Return On Equity ratio was increased is -0.09. It is found from the study that, the
majority (-0.09) Return on Equity ratio is more in the years 2015-2016.
3.7RETURN ON INVESTMENT:
Net Profit
ROI = Total Investment * 100
3.7 TABLE RETURN ON INVESTMENT
YEAR NET PROFIT TOTAL RETURN ON

INVESTMENT INVESTMENT RATIO

%
2011-12 -47.72 160.55 -29.72
2012-13 -87.42 160.55 -54.45
2013-14 -159.38 160.55 -99.27
2014-15 -34.77 160.55 -21.66
2015-16 -55.07 160.55 -33.30
3.7 GRAPH RETURN ON INVESTMENT
RETURN ON INVESTMENT RATIO%

R 0
A 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016
-50 -29.72 -21.66 -33.3
T
-54.45
I -100
O -99.27
S -150
YEARS
RETURN ON INVESTMENT RATIO%
INTERPRETATION
It shows that table 3.6 Return On Equity Ratio during the year 2011-16 it shows
2011-2012 is -29.72,in the year 2012-2013 the Return On Equity ratio was
increased is -54.45, in the year 2013-2014 the Return On Equity ratio was
decreased is -99.27,in the year 2014-2015 Return On Equity ratio was increased
is -21.66,in the year 2015-2016 Return On Equity ratio was increased is -33.03.
It is found from the study that, the majority (-0.09) Return On Equity ratio is
more in the years 2015-2016
3.8RETURN ON CAPITAL EMPLOYED
3.8 TABLE RETURN ON CAPITAL EMPLOYED RATIO
YEAR NET OPERATIG EMPLOYED RETURN

COST CAPITAL ONCAPITAL
EMPLOYED
2011-12 -53.50 596.07 -0.09

2012-13 -117.48 487.85 -0.24

2013-14 -234 453.69 -0.52
2014-15 -49.38 392.48 -0.13
2015-16 -75.24 365.84 -0.21
RETURN ONCAPITAL EMPLOYED

0
R 2011-2012 2012-2013 2013-2014 2014-2015 215-2016
-0.1
A -0.09
-0.2 -0.13
T -0.21
-0.3 -0.24
I
O -0.4
S -0.5
-0.6 -0.52
YEARS
RETURN ONCAPITAL EMPLOYED
3.8
GRAPH RETURN ON CAPITAL EMPLOYED RATIO
INTERPRETATION
It shows that table 3.6 Return On Equity Ratio during the year 2011-16 it shows
2011-2012 is -0.09, in the year 2012-2013 the Return On Equity ratio was
increased is -0.24, in the year 2013-2014 the Return On Equity ratio was
decreased is -0.52, in the year 2014-2015 Return On Equity ratio was increased is
-0.13, in the year 2015-2016 Return On Equity ratio was increased is -0.21. It is
found from the study that, the majority (-0.09) Return on Equity ratio is more in
the years 2015-2016.
3.9 Standard deviation:

( xx )2

SD =

3.9 Table of Descriptive Statistics
Mean Std. Deviation N
Debt equity ratio 3.8840 .72424 5
Net profit ratio -9.0820 7.70584 5
operating ratio 13.9320 5.20547 5
operating profit ratio 86.0680 5.20547 5
Debt ratio .7880 .03347 5
Return on equity ratio -.2380 .16873 5
Return on investment -47.6800 31.27998 5
Return on capital employed -.2380 .16873 5
3.10 Correlation
XY
r =
X 2 Y 2

3.10 Table of Correlations
Return
Debt Net on Return on
equity profit operating operating Debt equity Return on capital
ratio ratio ratio profit ratio ratio ratio investment employed
Debt equity Pearson

1 .150 .869 -.869 .997** .024 .046 .283
ratio Correlation
Sig. (2-
.809 .056 .056 .000 .969 .941 .645
tailed)
N 5 5 5 5 5 5 5 5
Net profit Pearson

.150 1 .312 -.312 .097 .982** .846 .857
ratio Correlation
Sig. (2-
.809 .609 .609 .876 .003 .071 .064
tailed)
N 5 5 5 5 5 5 5 5
operating Pearson
.869 .312 1 -1.000** .864 .250 .125 .366
ratio Correlation
Sig. (2-
.056 .609 .000 .059 .685 .841 .545
tailed)
N 5 5 5 5 5 5 5 5
operating Pearson
-.869 -.312 -1.000** 1 -.864 -.250 -.125 -.366
profit ratio Correlation
Sig. (2-
.056 .609 .000 .059 .685 .841 .545
tailed)
N 5 5 5 5 5 5 5 5
Debt ratio Pearson

.997** .097 .864 -.864 1 -.021 -.030 .209
Correlation
Sig. (2-
.000 .876 .059 .059 .973 .961 .736
tailed)
N 5 5 5 5 5 5 5 5
Return on Pearson
.024 .982** .250 -.250 -.021 1 .777 .767
equity ratio Correlation
Sig. (2-
.969 .003 .685 .685 .973 .122 .130
tailed)
N 5 5 5 5 5 5 5 5
Interpretation
From the above Table 3.10, it is observed that the correlation between selected
variables such as Debt Equity ratio and other remaining ratios. Debt Equity ratio
has strong positive correlation with the variables are Operating ratio (0.869),
Debt ratio (0.997), and weak positive correlation with the variables are Net Profit
ratio(0.150), Return On Equity ratio(0.024), Return on Investment(0.046) And
Return on Capital Employed(0.283) . There is no strong negative correlation
variables and weak negative correlation with the variables are Operating Ratio (-
0.869).The remaining ratios compare to the same as the above.
4.1 FINDINGS AND DISCUSSION

Debt Equity Ratio was increased is 3.77,in the year 2015-2016 Debt
Equity ratio was decreased is 2.86. It is found from the study that, the
majority (4.62) Debt Equity ratio is more in the year 2011-2012.
Net profit Ratio was decreased is -22.62, in the year 2014-, and it was
increased is -4.37. It is found from the study that, the majority (-4.17) Net
profit ratio is more in the year 2013-2014.
Operating Ratio was decreased is 9.67; in the year 2015-2016 Operating
ratio was increased is 9.99. It is found from the study that, the majority
(21.00) Operating ratio is more in the year 2011-2012.
Operating Profit Ratio during the year 2011-16 it shows 2011-2012 is
79.00, It is found from the study that, the majority (90.33) Operating
Profit ratio is more in the year 2014-2015.
Debt Ratio during ,in the year 2015-2016 Debt ratio was decreased is
0.74. It is found from the study that, the majority (0.82) Debt Equity ratio
is more in the years 2011-2012 and, 2012-2013.
Return On Equity Ratio was decreased is -0.52,in the year 2014-2015 its
increased in -0.09. It is found from the study that, the majority (-0.09)
Return On Equity ratio is more in the years 2015-2016.
Return On Equity in the year 2013-2014 the Return On Equity ratio was
decreased is -99.27, the majority (-0.09) Return On Equity ratio is more
in the years 2015-2016

Return On Equity Ratio in the year 2013-2014 the Return On Equity ratio
was decreased is -0.52, in the year 2014-2015 Return On Equity ratio was
increased is -0.13, in the year 2015-2016 Return On Equity ratio was
increased is -0.21.
4.2 SUGGESTIONS
The debt promotion is more than the idle ratio 2:1. The debt equity ratio is
going beyond the idle ratio during the study period, therefore the
management should think over their capital structure and its suitability of
their objectives.
The management should relay more on internal funds than external funds
which makes the company strong financial solvency.
The firm is investing most of the debt funds in improving the fixed assets.
It will be suggestible to continue the same to have a financial soundness.
The proportions of debt funds are increasing rapidly than the increment of
owners funds.
4.3 CONCLUSION
This study revealed the impact of the total debt (TD), Age of the firm (AGE),
debt-equity ratio (DE) and the long term debt to capital employed ratio (LDCE)
on the returns on investment and returns on assets (ROI and ROA) of the firm.

The relationship between the independent variables and firms performance is
analyzed through the regression model measured with respect to returns on
investment and asset (ROI and ROA). Return on assets of the company was not
the minimum satisfactory level. Overall financial performance of SHIVA
SHAKTHI DAIRY was satisfactory.
Capital structure refers to mix of debt and equity used by a firm in financing its
assets. The capital structure decisions are one of the most important decisions
made by financial management. The capital structure decisions is at the center of
many other decisions in the area of corporate finance.
Capital structure and their determinants have been one of the primary subjects of
research in corporate finance. This study attempted to find the determinants of
capital structure of the chemicals company SHIVA SHAKTHI DAIRY. The
conclusion of the study suggests that the estimation coefficients on the variables
of tangibility, profitability, firm size and non-debt tax shields are largely
consistent with the explanations of trade-off theory and provided past empirical
findings also.
BIBLIOGRAPHY
BOOKS NAME OF THE AUTHOR

Financial management I.M. Pandey
Financial management Sudarshan Reddy
Financial management Prasanna chandhra
Web sites
www.srikalahashthipipes.com
www.google.com
www.moneycontrol.com

Capital Structure and Profitability

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Capital Structure and Profitability

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CAPITAL STRUCTURE AND PROFITABILITY SS DAIRY

1.1 Introduction to Topic

promotional stage up to end, finance plays an important role in companys life. If

the entire organization suffers. It is therefore necessary that correct estimate of

to permanent financing of a firm. It is composed of long term debt, preference

share capital and share holders funds.

According to Gerestenbeg, capital structure of a company refers to the

resources like loans, reserves, shares and bonds

banking or investment assets and liabilities. Finance consists of financial systems

ANMK, RAJAMPET 155N1E0048

which would contain many sub- categories.

Finance may be defined as the provision of money at the time when it is

required finance refers to the management of the flows of money through an

organization. Whether it will be a corporation, bank or government agency.

Finance management emerged as a district field of study at the turn of this

century, money eminent persons defined it in the following ways.

Definition of Financial Management:

Finance may be defined as the provision of money at the time when it is

required. Finance refers to the flows of money through an organization whether it

will be a corporation , school, bank or government agency.

The financial management is generally concerned with procurement,

allocation and control of financial resources of a concern.

To ensure regular and adequate supply of funds to the concern.

the earning capacity, market price of the share, expectations of the

should be utilized in maximum possible way at least cost.

internal investment and financing of a firm. The alternative approaches in finance.

Profit maximization approach

this that decreases profits are to be avoided in specific operational terms, as

applicable to financial management.

Wealth Maximization Approach

This is also known as value maximization or net present wealth

maximization. In current academic literature value maximization is almost

universally adopted as an appropriate etc.

1. As funds can be obtained from different sources so procurement of funds

is considered as an important problem of business concerns.

ANMK, RAJAMPET 155N1E0048

view for the company as there is no question of repayment of equity

capital except when the company is under liquidation.

funds as dividend expectations of share holders are normally higher than

prevalent interest rates.

Capitalization, Capital structure and profitability

According to Gerestenbeg, capital structure of a company refers to the

resources like loans, reserves, shares and bonds.

forms of debit as well as equity.

ANMK, RAJAMPET 155N1E0048

promotional stage up to end, finance plays an important role in companys life. If

Capitalization, Capital structure and profitability

the same. While capitalization is quantitative aspect of the financial planning of

an enterprise, captital structure is concern with qualitative aspect. Capitalization

refers to total amount of securities issued by a company while capital structure

refers to kinds of securities and proportionate amounts that make up

securities. Equity shares, preference shares, and debentures. A decision

proportion among these types of securities refers to the capital structure of an

Some authors on financial managements define capital structure in board

to capital structure as a profitability.

Importance of Capital Structure

ANMK, RAJAMPET 155N1E0048

The term Capital Structure refers to the relationship various long-term

Optimal Capital Structure

and then to maintain it.

Theories of Capital Structure

ANMK, RAJAMPET 155N1E0048

Different kinds of theories have been propounded by different authors to

Modigliani and Miller. The important theories are: