Research project final

A study on impact of liquidity ratios on company’s
profitability and performance.
SUBMITTED TO
INSTITUTE OF PUBLIC ENTERPRISE
Survey No. 1266, Shamirpet (V&M), R.R.Dist, Hyderabad, Telangana 500078
(2017 - 2019)
In partial fulfillment of the requirements for the award of the Degree of
POST GRADUATE DIPLOMA IN MANAGEMENT
BY
K T PHANINDRA
Under the esteemed guidance of
Dr. Deepthi Chandra
INSTITUTE OF PUBLIC ENTERPRISE

DECLARATION
I hereby declare that this Project Report titled, “A study on impact of liquidity ratios
on company’s profitability and performance.” submitted by me to Institute of Public
Enterprise, Shamirpet Campus, Hyderabad – 500 078, is a bonafide work undertaken by
me and it is not submitted to any other University or Institutions for the award of any
degree or diploma/certificate or published any time before.
K T PHANINDRA
PGDM RM
DATE: Signature of Student

ACKNOWLEDGEMENT
I would like to thank each and every person who supported me throughout the project. It
is my pleasure and opportunity to express my heart full gratitude to all for their constant
help and making this project a great success.
With immense pleasure, I wish to express my deep sense of gratitude to my
mentor Dr. Deepthi Chandra and I would also like to thank Dr. R. K. Mishra,
Director, Institute of Public Enterprise, having permitted me to carry out this
project work.
Lastly I would like to thank my friends and family members for their support and
cooperation.

Chapter-1
INTRODUCTION:
Ratio Analysis:
Ratio Analysis is the Quantitative Analysis of Financial Information from a company’s Financial
Statements or Share Price. Ratio Analysis is a common part of study of Business analysis. The
main aim of ratio analysis is to use the comparison and interpretation of financial data to gain
insights how a business is performing. Ratios are a key to Financial Analysis as they provide inputs
for evaluating and comparing a company’s performance to their pier’s or to an industries
benchmark. Ratios provide information used to measure corporate healthy which helps investors
to come to certain conclusions regarding the companies operational status.
Uses of Ratio Analysis:
1) Simplify Financial Statements:
Ratio analysis simplifies the data given in financial statements
such that investors can easily gain information by studying few ratios instead of trying to
understand the financial statements.
2) Create a Trend:
The analysis can predict the future performance of a company in business. It creates a trend
which makes it easier to predict the future and to analyse and to interpret the results.
3) Comparison of performance:
Ratio Analysis not only helps to analyse the performance of a
company but also helps it to compare it with other 2 or 3 companies in the same industry
or sector.

Limitations of Ratio Analysis:
1) Historical data entered in the calculation of financial ratios and ratio analysis make the
information that they give far from being current.
2) Various estimates in calculating ratios may lead to inaccurate information.
3) Ratios may not be an appropriate tool for comparing companies from different sectors as
they, may be operating in extremely different economic environments.
Types of Ratios:
1) Debt Ratios,
2) Liquidity Ratios,
3) Profitability Ratios,
4) Cash Flow Ratios,
5) Market Value Ratios.
1) Debt Ratios:-
The debt ratio is important ratio given that companies rely on a mixture of equity and liability to
finance their operations, and knowing the amount of debt held by a company is useful in evaluating
whether it can pay its debts as they come due.
2) Liquidity Ratios:-
Liquidity ratios are those ratios which measure how liquid are the company’s assets (i.e., how
easily can they be converted into cash) as compared to its Current Liabilities. Liquidity ratios are
an indicator whether a company’s current assets will be sufficient to meet the company’s
obligations when they become due.
3) Profitability Ratios:-
Profitability ratios measure the profit generating ability of a
company relative to its Sales, Assets and Equity. These ratios present an efficient way to judge a
company’s individual performance and also a good way to compare with its competitors relative
to the Industry’s Benchmark.

4) Cash Flow Ratios:-
Cash flow Ratios are those comparisons of cash flows to other elements of an entity’s Financial
Statements. Cash Flows are the money generated from the Business Activities. A cash flow ratio
state that how well does a company’s current liabilitiesare covered by its cash flows.
5) Market Value Ratios:-
Market Value Ratios are used to evaluate the current share price of a
publicly held companies stock. These ratios are employed by current and potential investors to
determine whether a company’s shares are under-priced or over.
Sources of Information:-
Ratio Analysis is essentially built around financial information from the
financial records of the business. The two main sources of financial information are:-
Income Statement: Income statement is a record of income and expenses relating to the business
for a particular period. From Income Statement data regarding Revenue, Cost of sales, Gross
Profit, Net Profit, etc. are considered for analysis.
Balance Sheet: Balance Sheet is a Snap-shot of Assets and Liabilities at a particular point of time.
From Balance Sheet data regarding the Current Assets, Current Liabilities, Inventories, Trade
receivables, Trade Payables, Long-Term Liabilities and Capital and Reserves are considered for
analysis.
Income Statement Balance Sheet

Key Stages in Ratio Analysis:
OBJECTIVES OF THE STUDY:
The aim of the study is to visualize, learn and evaluate the Impact of Debt Ratios on Company’s
Profitability and performance of various organization.
The study would specifically lead to the following objectives:
 To learn the effect of debt ratios on company’s performance.
 To learn how debt analysis creates an impact on finance the business of various
companies
 Analyse how managers use debt ratio to make decisions about the operating and
financial structures of their companies.
 Analyse how managers, owners, and creditors use debt ratios to make decisions about
investing.
Gather
Information.
Calculate Ratios
Interpretate the
data.

NEED FOR THE STUDY:
 The need for the study is to understand the importance of Debt ratios and the role they play
in assessing a company’s profitability and performance.
 This study helps us to know the various types of debt ratios and the role played in assessing
the performance of the company.
RESEARCH METHODOLOGY:
 The information used in this report is the company’s financial statements gained from US
Securities and Exchange Commission.
 The data used for this study is Secondary Data provided by the company.
 MS-EXCEL is used to analyse and interpret the data gathered from the financial
statements,Mainly Income Statements, Balance Sheets and Cash Flow Statements are used
for calculating ratios and preparing reports and graphs.

Chapter-4:
Finance:
Finance is a term describing the study and system of money, investments, and other
financial instruments. Some people prefer to divide finance into three distinct categories: public
finance, corporate finance, and personal finance. There is also the recently emerging area of social
finance. Behavioural finance seeks to identify the cognitive reasons behind financial decisions.
Financial Accounting:
Financial accounting is the process of recording, summarizing and reporting the
myriad of transactions resulting from business operations over a period of time. These transactions
are summarized in the preparation of financial statements, including the balance sheet, income
statement and cash flow statement, that record the company's operating performance over a
specified period.
Financial Management:
Financial Management means planning, organizing, directing and controlling the
financial activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
Debt Ratio:
A Debt Ratio is any one of several financial measurements that look at how much capital comes
in the form of loans, or assesses the ability of a company to meet its financial obligations. The debt
ratio is important given that companies rely on a mixture of equity and liability to finance their
operations, and knowing the amount of debt held by a company is useful in evaluating whether it
can pay its debts as they come due.
Too much debt can be dangerous for a company and its investors. However, if a company's
operations can generate a higher rate of return than the interest rate on its loans, then the debt is
helping to fuel growth in profits. Nonetheless, uncontrolled debt levels can lead to credit
downgrades or worse. On the other hand, too few debts can also raise questions. A reluctance or
inability to borrow may be a sign that operating margins are simply too tight.
A high debt ratio generally indicates that a company has been aggressive in financing its growth
with debt. This can result in volatile earnings as a result of the additional interest expense. If the
company's interest expense grows too high, it may increase the company's chances of a default or
bankruptcy. Businesses that require large capital expenditures , such as utility and manufacturing
companies, may need to secure more loans than other companies. It's a good idea to measure a
firm's leverage ratios against past performance and with companies operating in the same industry
to better understand the data.

Profitability:
Profitability is the ability of a business to earn a profit. A profit is what is left of the revenue a
business generates after it pays all expenses directly related to the generation of the revenue, such
as producing a product, and other expenses related to the conduct of the business activities.
Profitability is the primary goal of all business ventures. Without profitability the business will not
survive in the long run. So measuring current and past profitability and projecting future
profitability is very important.
Financial Performance:
Performance in basic terms means presenting/completing a task or a function with application of
knowledge, skills and abilities. Financial Performance includes analysis and interpretation of
financial statements in such a way that it undertakes full diagnosis of Profitability and Financial
Soundness of the business.Financial Performance means achieving results or objectives and is an
important aspect of risk management.
Sources of Debt for a Company:
The prime sources of debt are mainly divided into four categories. They are:
A) Personal Savings
B) Investors
C) Loans
D) Government Grants and Loans
Personal
Savings
Investors
Loans
Government
Grants and
Loans

A)Personal Savings:
Personal savings and other assets make a great source of capital. Acquisition
costs are minimal, and we won't be paying interest on a bank loan or sharing returns with investors.
The drawbacks are that if you plough your personal savings into a business venture, you could lose
it all. Some assets, such as retirement accounts, are safe from creditors and bankruptcy courts;
placing such assets at risk may not be good for you, especially if you're approaching retirement
age and are running out of time to rebuild depleted accounts.
B)Investors:
An investor is any person who commits capital with the expectation of financial
returns. Investors utilize investments in order to grow their money and/or provide an income
during retirement, such as with an annuity. These investors may be active partners in the business,
or they may be silent investors who simply provide capital and wait for their returns. The
disadvantage to bringing in investors is that you do give up a certain element of control over the
company. Even if you retain a majority interest, you'll need to keep your investors happy.
Additionally, if you share the risk with others, you'll also have to share the profits.
C)Loans:
A loan is money, property or other material goods that is given to another party
in exchange for future repayment of the loan value amount along with interest or other finance
charges. A loan may be for a specific, one-time amount or can be available as an open-ended line
of credit up to a specified limit or ceiling amount.
D)Government Grants and Loans:
The U.S. Small Business Administration offers several loan and grant programs
to help start-up companies and assist existing ventures in expansion; your home state may have
similar programs on a smaller scale. Grants are basically free money, and government-guaranteed
loans come with interest rates that are typically far below what you can get on your own. Finally,
a government-guaranteed loan is still a loan; you'll have to pay it back regardless of whether
business is good.
Debt Ratios:
Debt Ratio valuation is an important valuation for a company. It shows us up to
what extent the Total Debt is covered by the company’s Total Assets. A higher Debt Ratio
indicates that the company is in a risky position given, if the company’s rate of return is high then
the debt will be helpful in earning profits.

The various Debt Ratios are:
A. Asset Coverage Ratio
B. Capitalization Ratio
C. Debt Ratio
D. Debt-to-Equity Ratio
E. Debt-to-Income Ratio
F. Debt/EBITDA Ratio
G. Equity Multiplier
H. Equity Ratio
I. Fixed Assets to Net Worth
J. Fixed Charge Coverage Ratio
K. Interest Coverage Ratio (ICR)
L. Long Term Debt to Total Asset Ratio
M. Long Term Debt to Capitalization Ratio
A. Asset Coverage Ratio:
Asset Coverage Ratio measures the solvency of a company. It is popularly used among lenders
to know the extent up to which the company can repay in case of happening of any unfortunate
event. i.e. it measures how well a company can cover its short term obligations. The higher the
Asset Coverage Ratio is higher the chances of repayment of its debt.
A company with higher Asset coverage Ratio is considered less risky when compared with a
company with lesser Asset coverage ratio.

B. Capitalisation Ratio:
Capitalisation Ratio is used to measure the extent to which a company is using debt to fund its
business operations. Company uses this ratio to manage its capital structure and determine the
debt capacity.
A company with higher Capitalisation Ratio have higher risk of Insolvency and Bankruptcy.
Higher the ratio, Higher is the risk of Insolvency.
C. Debt Ratio:
Debt Ratio is a Ratio that measures the firm’s Total Liabilities as a
percentage of its Total Assets. Companies with high debt ratios are known as highly leveraged
companies.
A company with lower debt ratio implies a more stable business with potential of longevity.
Lower the ratio, Lower is the chance of losing.
D. Debt to Equity Ratio:
Debt to Equity Ratio is calculated by dividing Total Debt with Total Equity. Creditors consider
higher Debt to Equity ratio as riskier because it shows that company’s investors cannot fund
its operations as much as the creditors do. A debt ratio of 1 suggests that Investors and Creditors
have equal Stake in the Assets.
A company with high debt ratio suggests that the business is unstable. Companies with
lower Debt to Equity ratio are more preferred by Creditors to finance the companies.
Debt to Equity Ratio: Total Debt/Total Equity

E. Debt to Income Ratio:
Debt to Income ratio is calculated by dividing total debt with Total
income i.e. Income Earned Before Taxes. It is calculated for each month and for yearly ratio
we need to calculate the Average of all the months debt to income ratio.
Debt to Income Ratio is an important factor in measuring financial security. Lower the debt to
Income ratio, more are the debts you can afford. With a lower Debt to Income ratio we can
take more risks.
F. Net Debt to EBITDA:
Net Debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) ratio is a measurement of leverage calculated by (Total Debt-Cash and Cash
Equivalents) with EBITDA.
The Net debt to EBITDA ratio forecasts the time period it takes to repay the debt. A
higher Debt to EBITDA ratio indicates that the company is highly leveraged an it may find
difficulties in repaying debts.
G. Equity Multiplier:
Equity multiplier ratio measures the amount of Company’s Assets are
financed by its shareholders. It is calculated by comparing the company’s total assets with
company’s shareholders funds. The equity multiplier ratio shows the level of debt financing
is used to acquire assets and maintain operations.
Debt to Income Ratio: Total Debt/E.B.T
Debt /EBITDA: (Total Debt-Cash and Cash Equivalents)/E.B.I.T.D.A

A higher Ratio indicates that more assets were funded by Debt than by Equity. Lower ratios are
considered to be more conservative and more favourable than higher ratios. It is because
companies with lower ratios are less dependent on debt financing and have less debt servicing
costs.
H. Equity Ratio:
The equity ratio is an investment leverage that measures the amount of assets that are financed
by owners’ investments by comparing the total equity in the company to the total assets in the
company.
Companies with higher equity ratios show new investors and creditors that investors believe in
the company and are willing to finance it with their investments.
I. Fixed Assets to Net Worth:
Fixed assets to net worth is a ratio measuring the solvency of a company. This ratio
indicates the extent to which the owners' cash is frozen in the form of fixed assets, such as
property, plant, and equipment, and the extent to which funds are available for the company's
operations.
Net Fixed Assets is calculated by subtracting depreciation from Fixed Assets and Net worth is
the difference between Total Assets of the Company and Total Equity and Liabilities of the
company. A high ratio indicates that there is a low solvency level and has insufficient fixed
assets for continuing operations. It indicates that the firm cannot manage its Day to Day
operations if the Ratio is high.
J. Fixed Charge Coverage Ratio:
Fixed charge coverage ratio shows how well a business’s earnings covers its fixed charges.
The fixed charge coverage ratio is often calculated when a business incurs large amount of
debt and needs to make interest payment.
Fixed Assets to Net Worth:Net Fixed Assets/Net Worth

A high ratio shows that business can cover its fixed costs based on its current earnings. A low
ratio indicates that the costs cannot be covered.
K. Interest Coverage Ratio:
Interest coverage ratio measures the company’s ability to make
interest payments on its debt in a timely manner. It calculates the firms ability to afford
interest on the debt.
A low ratio indicates that the company will not be able to make
interest payments on the debt borrowed. It should maintain high ratio so that creditors will be
interested in providing finance to the firm.
L. Long Term Debt to Total Assets Ratio:
Long term Debt to Total Assets Ratio is a solvency ratio which
calculates the company’s leverage by comparing its Total long term Debts to its Total Assets.
It measures the percentage of assets that business would need to liquidate to pay of its debts.
A high ratio, signifies that management has less free cash flow and less ability to finance new
operations.So it should maintain low ratio.
M.Long Term Debt to Capitalization:
Long term debt to capitalization ratio allows the investors to figure out the total risk of
investing. This ratio allows the investors to identify the amount of control utilized by a
company and compare it to other companies to analyse the total risk experience of that
particular company.
Long Term Debt to Capitalization Ratio: Long Term Debt/ (Long Term Debt+ Preference Stock+ Common Stock)

A higher ratio indicates that the company is weak financially and it would increase the risk of
the company as investors will not be ready to invest in the company. Hence these are the
different types of Debt ratios. Investors and creditors with the help of these ratios calculate the
total debt covered by the total assets and forecast the future returns.
In the next chapter, detailed presentation is given. A sample of 20 companies is considered and
out of the 13 Debt ratios, 4 main Debt ratios like Capitalization ratio, Debt Equity ratio, Interest
Coverage ratio and Debt ratio are taken for calculation. Return on Assets are calculated and Taken
as a base for Comparison for the study.
Chapter-5:
Variables:
Data for this study is gathered from twenty company’s financial statements and values are
generated and processed and the average values for each ratios are calculated and summed up for
easy interpretation of the values. The values are taken for three years and 4 main variables are
considered for evaluation. They are:
1) Capitalisation Ratio,
2) Debt Ratio,
3) Debt-Equity Ratio,
4) Interest Coverage Ratio.
In addition to the above ratios, The Return on Assets and the Total Assets are considered for
calculation and The Return on Assets is considered as a dependent variable for the study and the
total Assets act as a Base for the Study.
1) Capitalisation Ratio:
Capitalisation Ratio is used to measure the extent to which a company is
using debt to fund its business operations. Company uses this ratio to manage its capital
structure and determine the debt capacity.
 Debt Ratio: Debt Ratio is a Ratio that measures the firm’s Total Liabilities as a
percentage of its Total Assets. Companies with high debt ratios are known as highly
leveraged companies.

2) Debt-Equity Ratio:
Debt to Equity Ratio is calculated by dividing Total Debt with Total
Equity. Creditors consider higher Debt to Equity ratio as riskier because it shows that
company’s investors cannot fund its operations as much as the creditors do. A debt ratio of
1 suggests that Investors and Creditors have equal Stake in the Assets.
3) Interest Coverage Ratio:
Long term Debt to Total Assets Ratio is a solvency ratio which calculates
the company’s leverage by comparing its Total long term Debts to its Total Assets. It
measures the percentage of assets that business would need to liquidate to pay of its debts.
Comparison of ROA among the selected companies and Capitalization Ratio among the selected
companies
Table1: Three years Mean values of ROA and Capitalisation Ratios of Selected Companies
S.No Company Name: ROA Capitalisation Ratio
1 Viacom INC 0.076 0.720
2 Vulcan Materials 0.046 0.331
3 Waste Management INC 0.061 0.624
4 Waters CORP. 0.075 0.454
5 WEC Energy Group 0.030 0.538
6 Cotiviti Holdings 0.032 0.477
7 Covanta Holding CORP. 0.009 0.833
8 Crane Co. 0.051 0.386
9 Crestwood Equity Partners -0.160 0.415
10 Greif INC 0.029 0.509
11 Fuller H B Co. 0.039 0.519
12 Hecla Mining Co. -0.007 0.260
13 National Health Investors INC 0.065 0.464
14 Vitamin Cottage INC 0.044 0.198

15 Wellcare Health Plans 0.104 0.501
16 Wesco Aircraft Holdings -0.055 0.532
17 Wesco International 0.034 0.420
18 West Pharmaceutical Services 0.074 0.161
19 Westar Energy INC 0.028 0.497
20 Westing House Airbrake Corp. 0.069 0.549
Source: Student’s Analysis
Interpretation:
Return on Assets:
 Return on Assets for most of the companies is below 10%. The highest average ROA value is
10.4, for Wellcare health plan only. In case of other companies ROA values are not even in
double digits.
 In some cases the ROA values are negative, which indicates that the shareholders value or the
firm’s value is deteriorating.
 Well care Health Plan has the highest ROA and Crestwood Equity Partners has the least ROA.
Capitalization Ratio:
 For Capitalisation ratio, half of the selected companies have more than 50% of their capital in
debt form which indicates that debt composition is very high and the companies are at risk
and their chances of insolvency are more.
 However, there are some other parameters to check the solvency position of the company.
 Companies with higher Capitalization ratio show that their Debt component is high and their
Equity component is low.
 Covanta Holding Corp. has the highest Capitalization Ratio and Vitamin Cottage INC has the
least.

Comparison of Debt Ratio among the selected companies and Debt-Equity Ratio among the
selected companies
Table:2Three years mean values of Debt Ratio and Debt-Equity Ratio of selected companies.
S.No Company Name: Debt Ratio Debt Equity Ratio
1 Viacom INC 0.796 0.986
4 Waters CORP. 0.535 0.833
8 Crane Co. 0.649 0.632
9 Crestwood Equity Partners 0.471 0.716
10 Greif INC 0.678 1.038
11 Fuller H B Co. 0.624 1.274
12 Hecla Mining Co. 0.382 0.351
16 Wesco Aircraft Holdings 0.591 1.147
Source:Author’s Analysis

Interpretation:
Debt Ratio:
 A company with higher Debt Ratio indicates that the chances of longevity for the company are
low.
 In the above selected companies, Well Care Health Plans has the highest debt ratio when
compared to other companies.
 Companies having lower Debt Ratio imply that their Liabilities are covered by their Assets and
in the selected companies most of them have lower Debt Ratios.
 Well Care Health plans has the highest debt ratio and West Pharmaceuticals company has the
least ratio.
Debt-Equity Ratio:
 Companies with highest Debt to Equity Ratio interpret that they have been aggressive in
financing through Debt, which indicates that it may cause Financial Distress in the future.
 Out of the above selected companies, 7 companies have higher Debt-Equity ratio. Other
companies have lower ratio which indicates that the chances of having a financial distress is low.
 Companies having Higher Debt-Equity Ratio indicates that the company is preferringmore
creditor financing than investor financing.
 But as we can see, many companies are gathering funds through investor financing.
 Among the selected companies, Covanta Holding corp. has the highest Debt-Equity ratio and
West Pharmaceuticals has the least.

Comparison of Interest Coverage Ratio among the selected companies and Assets among the
selected companies
Table:3 Three years Mean values of Interest Coverage ratio and Assets for Selected Companies.
S.No Company Name: Interest Coverage Ratio Assets
(US $ in
Thousands)
1 Viacom INC 4.288 22807.667
4 Waters CORP. 13.734 4751696.667
8 Crane Co. 8.846 3454.367
9 Crestwood Equity Partners -5.516 4845.833
10 Greif INC 3.367 3233.667
11 Fuller H B Co. 5.331 2819588.667
12 Hecla Mining Co. 1.888 2319519.667
16 Wesco Aircraft Holdings -2.168 1907886.000

Interpretation:
Interest Coverage Ratio:
 A company with higher Interest coverage ratio indicates that the company can repay its interests
and their Earnings are high when compared with their expenditure.
 ICR for most of the selected companies is high which indicates that they can make their interest
repaymentrs.
 Only one company has lower ICR and two companies have Negative ICR which indicates that
those companies cannot repay their interests.
 West Pharmaceutical Services have the highest Interest Coverage Ratio and Crestwood Equity
partners have the least ratio.
Assets:
 Assets are items of value an organization holds or controls.
 Companies with higher Assets indicate that in case of insolvency, they can meet repay their
Short term and long term debts.
 It can differ based on the nature of the company and its liabilities.

Table 4: Descriptive Analysis
Descriptive Statistics
ROA CapR DebtR DER IntCR Assets
Mean 0.05 0.47 0.69 1.1 5.67 2335422
Std.
Deviation
0.12 0.14 0.49 1.05 6.13 3206491
Skewness 2.68 0.101 3.94 3.2 0.95 1.62
Kurtosis 11.49 0.79 16.72 12.16 1.55 2.28
Minimum -0.16 0.16 0.35 0.19 -5.52 1758
Maximum 0.5 0.83 2.69 5.13 20.92 11272369
Source: Author’s Analysis
This table provides the descriptive statistics for all variables considered in this study. The mean
ROA is 5.35% which can be considered as a proxy for measuring the financial position of the
company. The minimum value of ROA is negative (-0.16). It means there are few companies in
the sample who are losing their shareholder value.
The mean value for Capitalization ratio is 0.46 and the Average Debt Equity Ratio is 1.1which is
quite near to the ideal Debt Equity ratio. It indicates that the companies have a good composition
of Debt Equity on an average. Mean value for Interest Coverage ratio is quite high (5.67). The
value of Skewness Positive for all variables, which means data is positively skewed and the Right
tail of distribution is longer than the Left tail. The reference standard is a normal distribution which
has a Kurtosis of 3. In case of ROA, Debt Equity ratio and Debt ratio, The Value of Kurtosis is
more than 3, where as in the case of Capitalization ratio, Interest Coverageratio and Total Assets
the values are less than 3. Where the values are less than 3, it shows that the distribution has high
peak and data is normally distributed.

Table5: Correlation Analysis
Correlation
ROA CapR DebtR DER IntCR Assets
ROA Pearson
Correlation
1
Sig. (2-
tailed)
CapR Pearson
Correlation
-0.349 1
Sig. (2-
tailed)
0.131
DebtR Pearson
Correlation
0.021 0.276 1
Sig. (2-
tailed)
0.928 0.239
DER Pearson
Correlation
-0.169 .738**
0.399 1
Sig. (2-
tailed)
0.477 0 0.081
IntCR Pearson
Correlation
.806**
-0.288 0.027 -0.262 1
Sig. (2-
tailed)
0 0.218 0.909 0.265
Assets Pearson
Correlation
-0.09 -0.108 -0.218 -0.232 0.066 1
Sig. (2-
tailed)
0.705 0.65 0.355 0.326 0.783
The table-5 depicts the Correlation between different ratios and Return on Assets and
Total Assets. The matrix has shown positive relation between Return on Assets ratio to Debt ratio
(0.021) and, Return on Assets ratio to Interest coverage (.806). But the Return on Assets ratio to
Capitalization ratio (-0.349) and have shown a negative relation. Even the Debt Equity ratio and
Assets have shown negative relation. As we can see, The Debt ratio (0.276) and the Debt equity

ratio (0.738) has shown a positive relation with capitalization ratio and Interest coverage (-0.288)
and Assets (-0.108) have shown a negative relation but they are significant. The correlation
between Debt ratio to Debt equity ratio (0.399) and Debt ratio to Interest coverage Ratio (0.027)
is positive whereas the relation between Debt Ratio and Assets (-0.218) is found to be negative but
significant. The Debt Equity ratio when compare with Interest coverage (-0.262) ratio and Assets
(-0.232), we can see that there exists a negative but significant relation. The relation between
Interest coverage ratio and Assets (0.66) remains positive.
Out of all the ratios, there is a significant co-relation between ROA and Interest
Coverage Ratio. The companies having good Interest Coverage Ratio have indicate their
capability to meet interest expenses have positive effect on the performance of the company’s
measured through ROA.
After correlation analysis finally regression analysis has been employed to measure the effect of
debt on the performance of company.
Table: 6 Regression Analysis Results
Coefficients
Variables Unstandardized Coefficients Beta t Sig.
B Std. Error
(Constant) 0.062 0.070 0.891 0.388
CapR -0.232 0.159 -0.312 -1.453 0.168
DebtR -0.011 0.039 -0.045 -0.280 0.784
DER 0.029 0.025 0.258 1.136 0.275
IntCR 0.015 0.003 0.793 5.244 0.000
Assets -4.667 0.000 -0.126
F value 7.021 Sig 0.000
R Square 0.715
Adjusted R
square
0.613

The table 6 mentioned above depicts the effect of debt ratios on company’s profitability and
Performance through Regression Analysis. For this table a sample of 20 companies is considered
and ratios are calculated on their assets and liabilities. For each test Return on Assets ratio is
considered as Dependent variable and Capitalization Ratio, Debt Ratio, Debt Equity Ratio Interest
Coverage Ratio and Assets are considered as Independent Variables.
The value of Adjusted R2
is 0.613 (61.3%), i.e. more than 50%. It means that the overall effect of
all independent variables on dependent variables (ROA) is 61.3%. The F-value is 7.021 and is
significant. It indicates the soundness of the model. There is a negative impact of Capitalization
Ratio, Debt Ratio and Assets on ROA as indicated by Beta values, though it is not significant. It
is important to note that Interest Coverage Ratio has a significant effect on ROA. It means that
higher interest coverage ratio leads to better the performance of a company.
Findings:
1) Out of the selected companies, only one company has good ROA.Some company’s values are
negativewhich indicates that the shareholders value or the firm’s value is deteriorating.
2) Capitalization ratio states that if the debt composition is very high the companies are at risk and
their chances of insolvency are more when compared with other companies. In the above selected
companies, 10 companies have more than 50% of their capital in the form of debt.
3) A company with higher Debt Ratio indicates that the chances of longevity for the company are
low because the company has a higher overall debt. Generally a ratio of 0.5 is considered as a
good Debt ratio and most of the selected companies have a good debt ratio.
4) For majority of companies, Debt component is high and many companies these days are preferring
investor financing.
5) Companies with highest Debt to Equity Ratio interpret that they have been aggressive in financing
through Debt, which indicates that it may cause financial distress in the future. This is because,
in case of Insolvency, the debt must be repaid to the lender and the equity will not be sufficient
for repaying the debts.

6) The interest coverage ratio is a financial ratio that measures a company’s ability to make interest
payments on its debt in a timely manner. A ratio above than 1 is considered as a good Interest
Coverage Ratio. Out of the selected companies, Only one company has lower ICR and two
companies have Negative ICR which indicates that those companies cannot repay their interests.
7) Many companies have low Interest Coverage Ratios which indicates that these companies have
higher High Earnings.
8) There is a significant positive relation between Return on Assets and Interest Coverage Ratio
which indicates their capability to meet interest expenses and have positive affect on the
performance of the company.
9) Finally, there is a positive effect of company’s capacity of paying interest which has been
measured through interest coverage ratio on the returns of the company. The overall effect of all
ratios represent the effect of Debt on company’s performance is more than 50% which is quite
significant as shown in the variation analysis.
Suggestions:
1) In majority of the companies, Debt composition is more than fifty percent putting the companies
at risky position as they are selling Fixed-Interest bearing securities for their financing. It is
suggested that companies should have more equity in their finance-mix in order to reduce the
burden of paying interest though there is no capital structure.
2) Companies with highest Debt to Equity Ratio interpret that they have been aggressive in
financing through Debt, which indicates that it may cause financial distress in the future. This is
because, in case of Insolvency, the debt must be repaid to the lender and the equity will not be
sufficient for repaying the debts.
3) It is found that there is a significant effect of debt on the performance of the company as most of
the companies are capable to pay the interest on their debt instrument as they have sufficient
profit margin. However, In case of loss, they may not have sufficient surplus to pay interest and
in the situation of loss companies are bound to pay interest on their debt. So, this will put more
burden on company. Therefore, it is recommended that company should maintain and a portion
of debt and equity as their capital structure.

Conclusion:
While preparing this report I came to know the various types of ratios and their usefulness in
assessing a company’s performance. In this study, an attempt has been made to amslyse the effect
of debt on the performance of the selected companies. In this regard various debt ratios have been
taken to measure the size and composition of debt and ROA has been considered as a proxy for
measuring the company performance. This study has been conducted by taking the sample 20
companies listed on NYSE in different sectors for three years. Statements like 10K form are used
for gaining the data from Securities and Exchange Commission (SEC) website. It is found that
there is a positive effect of company’s capacity of paying interest which has been measured
through interest coverage ratio on the returns of the company. The overall effect of all ratios
represent debt component on company’s performance is more than 50%. It can be concluded that
if a company has maintained that level of debt proportion in its finance mix on which company is
capable enough to pay the fixed interests on it and to cover it adequately from its profit, it will
lead to better performance of the company.

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