Capital Structure and Financial Performance

A Case Study of STEEL AUTHORITY OF INDIA LIMITED (SAIL), VISAKHAPATNAM, ANDHRA PRADESH

Mr. P. Sanjeevi*
Dr. G. Srinivasa Rao**

Abstract
Capital structure is the most significant discipline of company’s operations. To understand how companies finance their operations, it is
necessary to examine the determinants of their financing or capital structure decisions. Company financing decisions involve a wide range of policy
issues. The relationship between capital structure and financial performance is one that received considerable attention in the finance literature. How
important is the concentration of control for the company performance or the type of investors exerting that control are questions that authors have
tried to answer for long time prior studies show that capital structure has relating with corporate governance, which is the key issues of state owned
enterprise. To study the effects of capital structure or financial performance, will help us to know the potential problems in performance and capital
structure. The analyze has been made the capital structure and its impact on Financial Performance during 2002 to 2012 (10 years) financial year of
Steel Authority of India Limited. This point of study considered Capital structure is dependent variable and financial performance parameters i.e. Gross
Profit ratio, Net Profit Ratio, Return on Capital Employed, Return on Equity, Return on Total Assets and Return on Fixed Assets are independent
variables.

Introduction and capital structure. The analyze has been made the
capital structure and its impact on Financial
Capital structure is most significant discipline of Performance during 2002 to 2012 (10 years) financial
company’s operations. To understand how companies year of Steel Authority of India Limited. This point of
finance their operations, it is necessary to examine the study considered Capital structure is dependent variable
determinants of their financing or capital structure and financial performance parameters i.e. Gross Profit
decisions. Company financing decisions involve a wide ratio, Net Profit Ratio, Return on Capital Employed,
range of policy issues. The relationship between capital Return on Equity, Return on Total Assets and Return on
structure and financial performance is one that received Fixed Assets are independent variables.
considerable attention in the finance literature. How
important is the concentration of control for the
company performance or the type of investors exerting
that control are questions that authors have tried to
answer for long time prior studies show that capital
structure has relating with corporate governance, which
is the key issues of state owned enterprise. To study the
effects of capital structure or financial performance, will
help us to know the potential problems in performance

*Assistant Professor, Samata College, Visakhapatnam

**Associate Professor, Head - Department of Management Studies, Samata College, Visakhapatnam

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 Capital Structure and Financial Performance

Conceptual Frame work • To evaluate the interrelationship between capital

Dependent Variable Independent Variable structure and performance.

Hypothesis of The Study

Gross Profit
Net profit Keeping the above objectives in mind, the following
hypothesis were framed and tested during the study
Debt ROCE period.
Equity Financial performance
ROE
NULL HYPOTHESIS (Ho)
ROA
Ho (1): There is no significant relationship between
ROFA Capital Structure and Gross Profit.
Ho (2): There is no significant relationship between
Capital Structure and Net Profit.
Mode of Analysis Ho (3): There is no significant relationship between
Capital Structure and Return on Capital Employed.
Capital structure: Ho (4): There is no significant relationship between
Role of debt to Total funds = Debt Capital Structure and Return on Equity.
X 100
Total funds Ho (5): There is no significant relationship between
Capital Structure and Return on Total Assets.
Financial Performance: Ho (6): There is no significant relationship different
Gross profit = Gross Profit between Capital Structure and Return on Fixed Assets.
X 100
Net Sales
Research Methodology
Net profit = Net Profit
X 100
Net Sales
The study was concerned with steel industry and it has
been confined to only one public limited viz. Steel
ROA = PAT
X 100 Authority of India Limited. The study was on the
Total Assets
secondary data, which was obtained from the published
sources i.e. Annual reports for the period of 10 years
ROI/ROE = PBIT
X 100 from, 2002-03 to 2011-12. The collected data was
Equity
analyzed with the help of ratio analysis. The many
accounting ratios used to predict the financial
ROCE = PAT
X 100 performance of the company, gives a warning only when
Capital Employed
it is too late to take corrective action.
ROFA = PAT
Gross Block (FA)
X 100 Limitations of The Study

Objectives of The Study The following are the limitations of the present study.
• The study was limited to 10 years from 2002-03 to
2011-12.
The focus of this study is impact of capital structure on
performance of the Steel Authority of India Limited. • The study was limited to one company.
• The data of this study has been primarily taken from
• To assess the financial performance of the Steel published annual reports only.
Authority of India Limited.
• To reveal the impact of capital structure on financial
performance.

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 Prastuti: Vol. 2, No. 1, July 2013

About The Company Burnpur (West Bengal). SAIL has three special and alloy
steels plants viz., Alloy Steels Plant at Durgapur (West
Introduction Bengal), Salem Steel Plant at Salem (Tamil Nadu) and
Steel Authority of India Limited (SAIL) is engaged in the Visveswaraya Iron and Steel Plant at Bhadravati
business of manufacturing and marketing steel and its (Karnataka). In addition to these, a Ferro Alloy producing
allied products. It is a fully integrated iron and steel maker, plant at Chandrapur is owned by Maharashtra
producing both basic and special steel products for Elektrosmelt Limited which is a subsidiary of SAIL. SAIL
construction, engineering, power, railway, automotive has eleven units viz. Research and Development Centre
and defense industries and for sale in export markets. for Iron and Steel (RDCIS), Centre for Engineering and
SAIL is also among the five Maharatnas of the country's Technology (CET) and Management Training Institute
Central Public Sector Enterprises. The company primarily (MTI), all are located at Ranchi, Central Coal Supply
operates in India and is headquartered in New Delhi, Organization (CCSO) located at Dhanbad, and Raw
India. The Government of India owns about 86 percent of Materials Division (RMD), Environment Management
SAIL's equity and retains voting control of the Company. Division (EMD), Growth Division (GD) and SAIL Safety
Organization (SSO) allocated are located at Kolkata.
Historical Perspective
Hindustan Steel (HSL) was initially designed to manage SAIL's wide ranges of long and flat steel products are
only one plant that was coming up at Rourkela. For Bhilai having much demand in the domestic as well as in the
and Durgapur Steel Plants, the preliminary work was done international market. This vital responsibility is carried
by the Iron and Steel Ministry. Since April 1957, the out by SAIL's own Central Marketing Organization (CMO)
supervision and control of these two steel plants were that transacts business through its network of 37 Branch
also transferred to Hindustan Steel. The registered office Sales Offices spread across the four regions, 25
was originally at New Delhi. It moved to Calcutta in July Departmental Warehouses, 42 Consignment Agents and
1956 and ultimately to Ranchi in December1959. The one 27 Customer Contact Offices. CMO’s domestic marketing
MT phases of Bhilai and Rourkela Steel Plants were effort is supplemented by its ever widening network of
completed by the end of December 1961. The one MT rural dealers, who meet the demands of the smallest
phase of Durgapur Steel Plant was completed in January customers in the remote corners of the country. With the
1962 after commissioning of the Wheel and Axle plant. total number of dealers over 2000, SAIL's wide market
The crude steel production of HSL went up from 0.158 MT spread ensures availability of quality steel in virtually all
(1959-60) to 1.6 MT. A new steel company, Bokaro Steel the districts of the country. SAIL's International Trade
Limited was incorporated in January 1964 to construct Division ( ITD), in New Delhi- an ISO 9001:2000 accredited
and operate the steel plant at Bokaro. The second phase unit of CMO, undertakes exports of Mild Steel products
of Bhilai Steel Plant was completed in September 1967 and Pig Iron from SAIL’s five integrated steel plants. With
after commissioning of the Wire Rod Mill. The last unit of technical and managerial expertise and know-how in
the 1.8 MT phase of Rourkela - the Tandem Mill-was steel making gained over four decades, SAIL's
commissioned in February 1968, and the 1.6 MT stage of Consultancy Division (SAILCON) at New Delhi offers
Durgapur Steel Plant was completed in August 1969 after services and consultancy to clients world-wide.
commissioning of the Furnace in SMS. Thus, with the
completion of the 2.5 MT stage at Bhilai, 1.8 MT at SAIL has a well-equipped Research and Development
Rourkela and 1.6 MT at Durgapur, the total crude steel Centre for Iron and Steel (RDCIS) at Ranchi which helps to
production capacity of HSL was raised to 3.7 MT in 1968- produce quality steel and develop new technologies for
69 and subsequently to 4MT in 1972-73. the steel industry. Besides, SAIL has its own in-house
Centre for Engineering and Technology (CET),
Organization Structure and Functional areas Management Training Institute (MTI) and Safety
The Steel Authority of India Limited (SAIL) is a company Organization at Ranchi. Our captive mines are under the
registered under the Indian Companies Act, 1956 and is control of the Raw Materials Division in Kolkata. The
an enterprise of the Government of India. It has five Environment Management Division and Growth Division
integrated steel plants at Bhilai (Chhattisgarh), Rourkela of SAIL operate from their headquarters in Kolkata.
(Orissa), Durgapur (West Bengal), Bokaro (Jharkhand) and Almost all our plants and major units are ISO Certified.
10
 Capital Structure and Financial Performance

Vision, Cred and Policies SAIL Major units and Producers are as given under:

(i) Vision: To be a respected world Class Corporation Integrated Steel Plants

and the leader in Indian steel business in quality, • Bhilai Steel Plant (BSP) in Chhattisgarh
productivity, profitability and customer satisfaction. • Durgapur Steel Plant (DSP) in West Bengal
(ii) Cred: We build lasting relationships with customers • Rourkela Steel Plant (RSP) in Orissa
based on trust and mutual benefit. We uphold • Bokaro Steel Plant (BSL) in Jharkhand
highest ethical standards in conduct of our business.
We create and nurture a culture that supports Corporate Plan-2012
flexibility, learning and is proactive to change. We To ensure long term growth, with cost and quality
chart a challenging career for employees with competitiveness, SAIL has drawn a Corporate Plan with
opportunities for advancement and rewards. We perspective up to 2012. The plan envisages maintaining
value the opportunity and responsibility to make a the market leadership of SAIL and growing in identified
meaningful difference in people's lives. growth segment. SAIL shall achieve a growth in
(iii) Policies of SAIL: production to about 20 MT of hot metal with
(a) HR Policy of SAIL: SAIL personnel directorate commensurate enhancement in the production of crude
shall ensure competent and committed team steel and saleable steel and increase the percentage of
engaged in building a culture of learning to achieve finished steel in its product-mix, by de bottlenecking and
excellence in performance and employee selective investments. Further, to improve
satisfaction through innovation and continual competitiveness the focus would be on Cost
improvement. competitiveness and Quality enhancement. Further, the
(b) Corporate Environmental Policy: SAIL reaffirms functional strategies in the areas of Marketing,
its commitment to contributing towards a clean and Operations, Human Resources, Finance and Information
sustainable environment and continually enhancing Technology have been evolved to support the key strategy
its environmental performance as an integral part of of growth with cost and quality competitiveness.
its business philosophy and values. Towards this
commitment, we shall: Special Steel Plants
• Integrate sound environmental management • Alloy Steels Plants (ASP) in West Bengal
practices in all our activities. • Salem Steel Plant (SSP) in Tamil Nadu
• Conduct our operations in an environmentally • Visvesvaraya Iron and Steel Plant (VISL) in Karnataka
responsible manner to comply with applicable legal
and other requirements related to its environmental Subsidiaries
aspects and strive to go beyond. • Indian Iron and Steel Company (IISCO) in West
• Progressively adopt cleaner and energy efficient Bengal
technologies. • Maharashtra Elektro smelt Limited (MEL) in
• Minimize waste generation and promote recovery, Maharashtra
recycle and reuse. • Bhilai Oxygen Limited (BOL) in New Delhi
• Increase greenery in and around our plants and
mines. Awards
• Strive for continual improvement in our The performance of SAIL has been widely recognized by
environmental performance by setting challenging all its stakeholders including Government of India,
targets, measuring progress, taking corrective action financial institutions, leading rating agencies and several
and communicating environmental information to industry bodies who have conferred several awards &
all concerned. accolades in various fields. Some of them are:
• Enhance environmental awareness amongst • Maharatna SAIL has received the prestigious Golden
employees working for and on behalf of us and the Peacock Environment Management Award for the
general populace around plants and mines. year 2011. The award, in recognition of SAIL's
• Encourage our business associates to adopt similar initiatives and achievements in the field of
approach for environmental protection. environment management, was presented by Union
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 Prastuti: Vol. 2, No. 1, July 2013

Minister for Home Affairs Shri P. Chidambaram on companies. There is not an information asymmetry, and
24th June, 2011. the company’s debt is free from risk. This field of
• SAIL was awarded SCOPE Meritorious Award for investigation is called static trade-off theory. It is
Environment Excellence & Sustainable Development characterized by the idea that firms set a target for a
for FY 2010. leverage ratio and move toward it. Optimum capital
• SAIL bagged Randstad Award for HR Practices & structure for the company can be determined only
Employer Branding for 2011 under 'Manufacturing through taking into account the advantages and
Industries' category. disadvantages of funds provided to the company by debt
• SAIL received the maiden Wockhardt Shining Star and equity capital. However, an attempt is made in this
CSR Award in the Iron & Steel Sector category in chapter to review some of the research studies done on
2011. the related topics to reflect on their findings and these are
• SAIL was conferred award for financial and presented here under which they were very interesting
operational strength by Indian Institute of Industrial and useful for our research. This was theoretically very
Engineering (IIIE) for the year 2009-10. sound but it was based on the assumptions of perfect
• BSP the HR Excellence Award by the Greentech capital market and no tax world, which were not valid in
Foundation in September, 2010. reality. The origin of the debate can be traced back to
• National Safety Award for 2008 to BSP announced by Modigliani and Miller’s 1958 irrelevance proposition,
the Ministry of Labour & Employment, Government which serves as the focal point of the major theories and
of India. the studies conducted afterwards. During the 1960s and
• Quality Summit New York Gold Trophy 2007 1970s, these studies presented criticism of Modigliani
(International Award for Excellence & Business. and Miller’s proposition by proposing imperfections that
• For the 7th consecutive year RSP bagged the might make the capital structure of a firm relevant. So,
Greentech Environment Excellence Gold Award. this was corrected in 1963. In correction, they
• SSP received the prestigious Greentech Gold Award incorporated the effect of tax on value and cost of the
2010 in Metal and Mining Sector for the year 2008- capital of the firm- Modigliani and Miller 1963.
09.
Jensen and Meckling (1976), were the first to present a
Review of Literature formal framework, which incorporates the significance of
agency costs for capital structure. They argue that an
Review of literature is necessary since it familiarizes the optimal capital structure can be achieved by offsetting the
researcher with concepts and conclusions already agency costs of debt against the benefits of debt. Two
evolved by earlier analysis. It also enable the present main types of conflicts can arise: conflicts between the
researcher to find out the scope for further study and management and the shareholders and conflicts between
frame appropriate objectives for the proposed the bondholders and the shareholders. The former
evaluation. Since the proposal of the study is to measure agency problem can arise because management has a
the capital structure and financial performance of Steel smaller stake in the residual claims compared to equity
Authority of India Limited, the previous studies made in holders. This may lead to behavior, which is less than
this area of research are briefly reviewed. It also includes optimal for maximizing the firm’s value. In this study, the
the opinions expressed by various authors in leading capital structure theory based on the agency costs. Firm
articles, journals and books. incurs two types of agency costs-cost associated with the
outside equity holders and cost associated with the
Modigliani and Miller (1958) have proposed that the presence of debt in capital structure. Total agency cost
capital structure doesn't have influence on the market first decreases and after certain level of outside equity
value of the company, which will be settled by the capital in Capital structure, it increases. Thus, this theory
composition of its assets. This is a model with several pleads the concept of optimal capital structure.
presuppositions unreal for the current context-in which
perfect markets are those without brokerage costs, and Chakraborty (1977) in his study found that age, retained
individual taxes and where it is possible to investors to earnings and profitability were negatively correlated with
obtain financing at the same rates practiced to the debit equity ratio, while total assets and capital
12
 Capital Structure and Financial Performance

intensity were directly related to it. He felt that a high cost Harrington (2005), in this study, supported the theories of
of capital for all the consumer industries was due to their capital structure, which indicates that profitability, is an
low debt component. Here, author strongly suggested important determinant of leverage. The results suggest
that high debt capital structure is favorable. that manufacturing firms in concentrated industries have
a slower rate of mean reversion in profitability when
Titman and Wessels (1988) pointed out that the tendency compared to firms operating in a more competitive
of managers to pursue personal interests at the expense environment. A slower rate of mean reversion in
of shareholders might produce a negative relation profitability leads to a greater response of leverage to
between tangible assets and debt levels. Who use the profitability.
ratio of tax credits over total assets and the ratio of
depreciation over total assets as measures of non-debt Mohammed Omran evaluates the financial and operating
tax shield. performance of newly privatized Egyptian state-owned
enterprises and determines whether such performance
Deesomsak, Paudyal and Pescetto (2004), found that firm differs across firms according to their new ownership
risk, growth opportunity and profitability do not have a structure. The Egyptian privatization program provides
significant impact on financial leverage of firms. What unique post-privatization data on different ownership
puzzles us about this study are the findings of the structures. Since most studies do not distinguish between
insignificant effects that profitability, growth and firm risk the types of ownership, this paper provides new insight
have on the capital structure differences among the firms. into the impact that postprivatization ownership
The twit study, on the other hand, does not offer evidence structure has on firm performance. The study covers 69
on the role of risk. In previous studies which do examine firms, which were privatized between 1994 and 1998. For
the effects of risk, most of them take accounting these newly privatized firms, these study documents
measurements of risk, usually volatilities or coefficient of significant increases in profitability, operating efficiency,
variations in profit, ROA, ROE, or sales revenue. We argue capital expenditures, and dividends. Conversely,
that these measures of risk may not be the primary significant decreases in employment, leverage, and risk
concerns of corporations in making the long-term are found, although output shows an insignificant
financing decisions about capital structures. As decrease following privatization. The empirical results
shareholders have the liberty to diversify their also show that Egyptian state owned enterprises, which
investments, they are likely to be concerned only about were sold to anchor-investors and employee shareholder
the systematic risk of equity of the firms. As risk, growth associations, seem to outperform other types of
and profitability are factors predicted to affect debt ratios privatization, such as minority and majority initial public
by various theories, we decide to reinvestigate their roles offerings.
using a two dimension data set to carry out both cross-
sectional and longitudinal studies. B.Nimalathasan & Valeriu Brabete (2010), they pointed
out capital structure and its impact on profitability: a
Voulgaries, F and Asteriou, D. (2004) in their study “size study of listed manufacturing companies in Sri Lanka. The
and profitability are the determinants of capital structure. analysis of listed manufacturing companies shows that
In the Greek manufacturing sector “revealed the capital Debt equity ratio is positively and strongly associated to
structure decisions of small and medium - sized all profitability ratios (Gross Profit, Operating Profit & Net
enterprises (SMEs) and large sized enterprises (LSEs). The Profit Ratios) Nimalathasan, B., Valeriu B., 2010 Capital
findings show that profitability is a major determinant of structure and Its Impact on Profitability.
capital structure for both size groups. However, efficient
assets management and assets growth were found to be
essential for the debt structure of LSEs, as opposed to
efficiency of current assets, size sales growth and high
fixed assets, which were found to substantially affect the
credibility of SMEs.

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 Prastuti: Vol. 2, No. 1, July 2013

Table 1: Capital Structure Leverage of Steel Authority of India Limited

Year Debt Total Funds Capital Structure Leverage
Rs. in '00 Lakhs Rs. in '00 Lakhs
2002-03 12970 21318 60.84
2003-04 8690 21243 40.9
2004-05 5770 26672 21.63
2005-06 4298 29549 14.54
2006-07 4181 31977 13.07
2007-08 3045 37889 8.03
2008-09 7563 46981 16.09
2009-10 16511 52769 31.29
2010-11 20166 51603 39.07
2011-12 16332 45558 35.85
Mean 9952.6 36555.9 28.131
SD 6100 12088.6 16.41
Skew 0.516 0.079 0.716
Range 1721 31526 52.81
Source: Compiled from Annual Reports of SAIL from 2002-03 to 2011-12.
Table 1 indicates the capital structure leverage of the SAIL. is only 0.53 and positively skewed. It is clear from the
Average of this ratio was 28.13 percent and its standard analysis that the ratio is fluctuating thought the study
deviation 16.41 percent. It represents low level of period.
leverage has been maintaining by the company. Its range

Table 2: Gross Profit Ratio of Steel Authority of India Limited

Year Gross Profit Sales GPR
Rs. in '00 Lakhs Rs. in '00 Lakhs
2002-03 2165 19207 11.27
2003-04 4657 24178 19.26
2004-05 11097 31805 34.89
2005-06 7381 32280 22.86
2006-07 10966 39189 27.98
2007-08 12955 45555 28.44
2008-09 10946 48738 22.46
2009-10 11871 43935 27
2010-11 9030 47041 19.19
2011-12 7658 50348 15.21
Mean 8872.6 38227.6 22.856
SD 3428,21 10842.49 6.98
Skew -0.888 -.645 0.010
Range 10790 31141 23.62
Source: Compiled from Annual Reports of SAIL from 2002-03 to 2011-12.
From the Table No.2 revealed that the GP Ratio of SAIL. of this ratio is 22.86 percent and 6.98 percent
This ratio indicates that how much a company is able to respectively. It is positively skewed and range of this is
earn after accounting for cost of goods sold to every rupee only 23.62 percent. It is one of the profitability
of revenue. It was found that GPR of SAIL is a fluctuating performance indicators of the company.
during the study period. Average and standard deviation

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 Capital Structure and Financial Performance

Table 3: Net Profit Ratio of Steel Authority of India Limited

Year Net Profit Sales NPR

Rs. in '00 Lakhs Rs. in '00 Lakhs
2002-03 -316 19207 1.89
2003-04 2628 24178 12.34
2004-05 9365 31805 32.83
2005-06 5706 32280 20.48
2006-07 9423 39189 27.78
2007-08 11469 45555 29.03
2008-09 9399 48738 21.75
2009-10 10132 43935 24.99
2010-11 7194 47041 16.84
2011-12 5151 50348 10.23
Mean 7015.1 38227.6 19.816
SD 3723.3 10842.49 9.58
Skew -0.883 -0.645 -0.544
Range 11785 31141 30.94

Source: Compiled from Annual Reports of SAIL from 2002-03 to 2011-12.

From the Table No.3 Net profit ratio indicates how much a of this ratio is 19.82 percent and 9.58 percent
company is able to earn after accounting for all the direct respectively. It is negatively skewed and range of this is
and indirect expenses to every rupee of revenue. It is only 30.94 percent. It is one of the profitability
found that Net Profit Ratio of SAIL was in fluctuating performance indicator of the company.
during the study period. Average and standard deviation

Table 4: Return on Capital Employed of Steel Authority of India Limited

Year PBIT Capital Employed ROCE

Rs. in '00 Lakhs Rs. in '00 Lakhs
2002-03 -1018 16541 -6.15
2003-04 3529 15218 23.19
2004-05 9970 20064 49.69
2005-06 6174 21438 28.8
2006-07 9755 25476 38.29
2007-08 11720 28450 41.2
2008-09 9658 34704 28.83
2009-10 10534 41696 25.26
2010-11 7669 39431 19.45
2011-12 6091 33333 18.27
Mean 7408.2 27635.1 26.683
SD 3871.11 9413.95 15.27
Skew -1.219 0.166 -0.764
Range 12738 26478 55.84

Source: Compiled from Annual Reports of SAIL from 2002-03 to 2011-12.

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 Prastuti: Vol. 2, No. 1, July 2013

From the Table No.4, Return on Capital Employed, it is a during the study period. SAIL has attained highest ROCE at
measure explains how well the firm is able to generate a 49.69 percent in the year 2004-05 and lowest ROCE for
return on the capital employed. This ratio indicates that SAIL was (6.15) percent in the year 2002-03. The
the firm has well the utilized the resources of owners to computed values of Mean, Range and standard deviation
generate return on the funds of owners. It is observed are 26.68 percent, 55.84 percent and 15.27 percent
that ROCE was in fluctuating trend for the company respectively. And also observed it is negative skeweness.

Table 5: Return on Equity of Steel Authority of India Limited

Year PAT Equity ROE Ratio
Rs. in '00 Lakhs Rs. in '00 Lakhs
2002-03 -314 1989 -15.78
2003-04 2512 4659 53.91
2004-05 6817 10011 68.09
2005-06 4013 12386 32.4
2006-07 6202 17184 36.09
2007-08 7537 23004 32.76
2008-09 6170 28148 21.92
2009-10 6754 33317 20.27
2010-11 4905 37069 13.23
2011-12 3543 39811 8.9
Mean 4813.9 20758 27.17
SD 2422.49 13565.74 23.51
Skew -0.064 0.055 0.000
Range 7851 37822 83.87

Source: Compiled from Annual Reports of SAIL from 2002-03 to 2011-12.

From the Table 4 It can be seen that Return on equity the year 2002-03. The computed values of Mean, Range
reveals, how well a company used reinvested earnings to and standard deviation are 27.17 percent, 83.87 percent
generate additional earnings. It is observed, SAIL was and 23.51 percent respectively. It is one of the finance
made highest ROE at 68.09 percent in the year 2004-05 indicators to evaluate the performance of the company.
and also indicated that lowest ROE was (15.78) percent in

Table 6: PAT to Total Assets of Steel Authority of India Limited

Year PAT Total Assets PAT TO TA

Rs. in '00 Lakhs Rs. in '00 Lakhs
2002-03 -314 21318 -1.47
2003-04 2512 21243 11.82
2004-05 6817 26672 25.56
2005-06 4013 29549 13.58
2006-07 6202 31977 19.4
2007-08 7537 37889 19.89
2008-09 6170 46981 13.13
2009-10 6754 52769 12.8
2010-11 4905 51603 9.5
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 Capital Structure and Financial Performance

2011-12 3543 45558 7.77

Mean 4813.9 36555.9 13.198
SD 2422.5 12988.6 7.4
Skew -1.064 0.079 -0.319
Range 7851 31526 27.03
Source: Compiled from Annual Reports of SAIL from 2002-03 to 2011-12.
From the Table No 6 reveals the performance of Return on percent in the year 2004-05 and lowest value of this ratio
Total Assets ratio, which measures the overall efficiency was (1.47) percent in the year2002-03. The computed
of capital invested in business. It indicates what the yield values of Mean, Range and standard deviation are 13.2
is for every rupee invested in assets. It is observed that percent, 27.03 percent and 7.4 percent respectively. And
ROTA was in fluctuating trend for the company during the also observed it is negative skeweness.
study period. SAIL was made highest ROTA of 25.56

Table 7: PAT to Fixed Assets Ratio of Steel Authority of India Limited

Year PAT Fixed Assets ROFA
Rs. in '00 Lakhs Rs. in '00 Lakhs
2002-03 -314 14036 -2.24
2003-04 2512 13168 19.07
2004-05 6817 12485 54.6
2005-06 4013 12162 32.4
2006-07 6202 11598 53.47
2007-08 7537 11571 65.14
2008-09 6170 12305 50.14
2009-10 6754 13615 49.6
2010-11 4905 15083 32.52
2011-12 3543 17127 20.68
Mean 4813.9 13315 37.538
SD 2422.5 1742.17 20.73
Skew -1.064 1.25 -0.631
Range 7851 5556 67.38
Source: Compiled from Annual Reports of SAIL from 2002-03 to 2011-12.

From the Table No.7, reveals the performance of Return Testing of Hypotheses
on Fixed Assets, it measures the efficiency of capital
invested for fixed assets in business. It indicates what the Correlation Analysis
yield is for every rupee invested in fixed assets. It is Correlation is concern describing the strength of
observed that ROFA was in fluctuating trend for both the relationship between two variables. In this study the
companies during the study period. It is observed that correlation co-efficient analysis is undertaken to find out
SAIL was made highest ROFA of 65.47 percent in the year the relationship between capital structure and financial
2009-09 and lowest of this ratio was (2.24) percent performance of SAIL. The measure of correlation is called
resulted in the year 2002-03. The computed values of the co-efficient of correlation. It is denoted by ‘r’ and the
Mean, Range and standard deviation are 37.54 percent, simplest formula for computing the appropriate t value to
67.38 percent and 20.73 percent respectively. And also it test significance of a correlation coefficient employs the t
is observed negative skeweness. distribution.

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 Prastuti: Vol. 2, No. 1, July 2013

n-2 Ho (3): There is no significant relationship between

t = r 1 - r2
Capital Structure and Return on Capital Employed.
The degrees of freedom for entering the t-distribution is Ho (4): There is no significant relationship between
N-2. Table value of (10-2) i.e. 8 degrees of freedom at 5% Capital Structure and Return on Equity.
level of significance is 2.306 for two tailed test. Ho (5): There is no significant relationship between
Capital Structure and Return on Total Assets.
NULL HYPOTHESIS (Ho) Ho (6): There is no significant relationship different
Ho (1): There is no significant relationship between between Capital Structure and Return on Fixed Assets.
Capital Structure and Gross Profit.
Ho (2): There is no significant relationship between
Capital Structure and Net Profit.

Table 8: Steel Authority of India Limited - Summary of “T”- Distribution Inferences

Relationship ‘r’ value Correlation result ‘ t’ value Remark
Correlation between Capital -0.754 Highly Negative //3.21// Significant
Structure and Gross Profit
Correlation between Capital -0.84 Highly Negative //4.34// Significant
Structure and Net Profit
Correlation between Capital -0.86 Highly Negative //4.73// Significant
Structure and Capital Employed
Correlation between Capital -0.55 Negative //1.85// Not Significant
Structure and Equity
Correlation between Capital -0.81 Highly Negative //3.97// Significant
Structure and Total Assets
Correlation between Capital -0.87 Highly Negative //5.08// Significant
Structure and Fixed Assets

Source: Computed
It can be seen from the Table 8. The correlation between Regression Analysis
capital structure financial performance of the SAIL. The Regression analysis is used to test the impact of financial
parameters i.e. Gross Profit ratio, Net Profit Ratio, Return performance on capital structure of the Steel Authority of
on Capital Employed Return on Total Assets and Return on India Limited. Capital structure is dependent variable and
Fixed Assets are significant. But Return on Equity is not financial performance parameters i.e. Gross Profit ratio,
significant; it indicates that performance is required to be Net Profit Ratio, Return on Capital Employed, Return on
other factors. Equity, Return on Total Assets and Return on Fixed Assets
are independent variables.

18
 Capital Structure and Financial Performance

Table 9.1: Capital structure and Gross Profit

Model Summary
Model R R Adjusted Standard
Square R Square error of the
Estimate
1 - .75 .563 .508 11.51
Source: Computed
The above table shows that the high negative correlation
was seen in between the capital structure and gross
profit.

Table 9.2: Coefficients

Unstandardized Standardized
Coefficients Coefficients

Model B Std. Error Beta t Sig.

(Constant) 68.453 13.077 5.234 .001

GP -1.764 .550 -.750 -3.210 .012

Source: Computed
The above table indicates the coefficient of correlation of variance with net profit is attributed to other factors. T
between the capital structure and gross profit. Multiple r2 value is supported that these result is significant at 5%
is 0.5625. That is 56.25% of variance of net profit is level.
accurate by the capital structure. But remaining 43.75 %

Table 10.1: Capital structure and Net Profit

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 -0.843 .711 .675 9.35488

Source: Computed
The above table shows that the high negative correlation
was seen in between the capital structure and net profit.

Table 10.2: Coefficients

Standardized
Unstandardized Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 56.756 7.094 8.001 .000

NP -1.445 .325 -.843 -4.440 .002

Source: Computed
19
 Prastuti: Vol. 2, No. 1, July 2013

The above table indicates the coefficient of correlation value is supported that these result is significant at 5%
between the capital structure and net profit. Multiple r2 is level.
7106. That is 71.06% of variance of net profit is accurate
by the capital structure. But, remaining 28.94% of Capital structure and Return on Capital Employed
variance with net profit is attributed to other factors. T

Table 11.1: Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 -0.859 .738 .705 8.91627

Source: Computed
The above table shows that the high negative correlation
was seen in between the capital structure and Return on
capital employed.

Table 11.2: Coefficients

Unstandardized Coefficients Standardized Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 52.764 5.909 8.930 .000

CE
-.923 .195 -.859 -4.744 .001

Source: Computed
The above table indicates the coefficient of correlation other factors. T value is supported that these result is
between the capital structure and ROCE. Multiple r2 is significant at 5% level.
0.7379. That is 73.79% of variance of Return on Capital
Employed is accurate by the capital structure. But, Capital structure and Return on Equity
remaining 26.21 % of variance with ROCE is attributed to

Table 12.1: Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1
-0.547 .299 .211 14.57731

Source: Computed
The above table shows that the high negative correlation
was seen in between the capital structure and Return on
equity (performance).

20
 Capital Structure and Financial Performance

Table 12.2: Coefficients

Unstandardized Coefficients Standardized Coefficients

Model B Std. Error Beta T Sig.

1 (Constant) 38.506 7.266 5.299 .001

NW -.382 .207 -.547 -1.847 .102

Source: Computed
The above table indicates the coefficient of correlation with ROE is attributed to other factors. T value is
between the capital structure and ROE. Multiple r2 is supported that these result is significant at 5% level.
0.2992. That is 29.92% of variance of ROE is accurate by
the capital structure. But, remaining 70.08 % of variance Capital structure and Return on Total Assets

Table 13.1: Model Summary

Model R R Square Adjusted R Square Standard error of the Estimate
1 -0.814 .854 .836 5.88
Source: Computed
The above table shows that the high negative correlation
was seen in between the capital structure and Return on
total assets.

Table 13.2: Coefficients

Unstandardized Coefficients Standardized Coefficients

Model B Std. Error Beta T Sig.

1 (Constant) 51.883 6.784 7.648 .000

TA -1.800 .453 -.814 -3.969 .004

Source: Computed
The above table indicates the coefficient of correlation variance with ROTA is attributed to other factors. T value is
between the capital structure and gross profit. Multiple r2 supported that these result is significant at 5% level.
is 0.6626. That is 66.26% of variance of ROTA is accurate
by the capital structure. But, remaining 33.74% of Capital structure and Return on Fixed Assets
(Gross Block)

Table 14.1: Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 -0.872 .760 .730 8.52225

Source: Computed

21
 Prastuti: Vol. 2, No. 1, July 2013

The above table shows that the high negative correlation

was seen in between the capital structure and Return on
fixed assets.

Table 14.2: Coefficients

Unstandardized Coefficients Standardized Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 54.042 5.806 9.308 .000

FA -.690 .137 -0.872 -5.039 .001

Source: Computed
The above table indicates the coefficient of correlation % of variance with ROFA is attributed to other factors. T
between the capital structure and ROFA. Multiple r2 is value is supported that these result is significant at 5%
0.7604. That is 76.04 of variance of return on fixed assets level.
is accurate by the capital structure. But, remaining 23.94

Table 15: Anova Table

Model Sum of Squares df Mean Square F Sig.

1 Regression 2187.981 6 364.664 4.616 .119a

Residual 237.017 3 79.006

Total 2424.998 9
a. Predictors: (Constant) GP, NP, ROCE, ROE, TA, FA
b. Dependent Variable: CP
An examination with ANOVA (F-value) indicates that relationship between the capital structure and financial
explains the most possible combination of predictor performance. The combined coefficient determinant 0.95
variables that could contribute to the relationship with and r2 coefficient is 0.902.
the dependent variables. For model1- F value is 4.61. We
see that all of the corresponding Fá i.e. 9.78 is greater t- Values of financial performance of key parameters are
than the computed value of F. Therefore we concluded GP at -3.21, NP at -4.34, ROE at -1.85 ROCE at -4.73 ROTA
that there is significant relation between capital structure at -3.97 and ROFA at -5.08 respectively. It is reflected that
and financial performance. It is reflect that the capital the variables GP, NP, ROCE, ROTA are insignificant
structure of the Steel Authority of India Limited could not relationship and variable ROE is significant relationship
depend on the debt capital. with capital structure.

Concluding Remarks It is focused on the overall point of the view of the

relationship between the capital structure and financial
Correlation Analysis explains regarding this study, there is performance (ROE). There is negative association at
strong negative relationship between capital structure -0.547. The co-efficient determination of is 0.299. F and t
and financial performance of independent variables GP, values are 3.41 and 5.299. It reflects the insignificant
NP, ROCE, ROE, ROTA and ROFA correlated with capital relationship between the capital structure and financial
structure. It is focused on the overall point of view of the performance. It implies that SAIL is not depending on the

22
 Capital Structure and Financial Performance

debt capital. Therefore, they have not pay interest • Financial Management- Theory and practice -
expenses much. Prasanna Chandra; Tata Mc Graw Hill Company
limited, New Delhi.
Suggestions and Recommendations • Introduction to financial management; O. Maurice
joy; Jack Clark Frances, Management of Investment.
• An optimal capital structure depends upon the • Khan M.Y. and P.K Jain., Financial Management - Text
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