It coves meaning of capital structure, leverage and ebit and eps analysis

1. Capital Structure, EBIT & EPS
Analysis, and Leverage
• Understanding Financial Decisions and Risk
Management

2. Introduction to Capital Structure
• • Definition: The mix of debt and equity financing
used by a company
• • Importance: Determines financial stability and
cost of capital
• • Components: Equity Capital, Debt Capital, Hybrid
Financing

3. Factors Affecting Capital Structure
• • Cost of Capital
• • Risk and Financial Leverage
• • Control Considerations
• • Flexibility in Financing
• • Market Conditions

4. EBIT (Earnings Before Interest &
Taxes)
• • Definition: A measure of a company's profitability
before interest and taxes
• • Formula: EBIT = Revenue - Operating Expenses
• • Importance: Used to assess operational efficiency

5. EPS (Earnings Per Share)
• • Definition: Profitability metric showing earnings
per outstanding share
• • Formula: EPS = Net Profit / Number of Shares
Outstanding
• • Importance: Key indicator for investors

6. EBIT-EPS Analysis
• • Purpose: Evaluates the impact of financing
decisions on EPS
• • Indifference Point: EBIT level where EPS remains
unchanged for different financing structures
• • Decision Making: Debt vs. Equity financing based
on EBIT levels

7. Leverage Overview
• • Definition: The use of borrowed funds to amplify
returns
• • Types of Leverage:
• - Operating Leverage
• - Financial Leverage
• - Combined Leverage

8. Operating Leverage
• • Arises due to fixed operating costs
• • DOL Formula: DOL = % Change in EBIT / % Change
in Sales
• • Impact: High DOL → Small revenue changes lead
to large profit variations

9. Financial Leverage
• • Results from debt financing
• • DFL Formula: DFL = % Change in EPS / % Change
in EBIT
• • Risk: Higher financial leverage increases financial
risk

10. Combined Leverage
• • Mix of Operating & Financial Leverage
• • DCL Formula: DCL = DOL × DFL
• • Importance: Helps in evaluating total business risk

11. Conclusion
• • Effective capital structure balances risk and
profitability
• • EBIT-EPS analysis aids in financing decisions
• • Leverage impacts returns but increases risk
• • Strategic decision-making is essential for financial
success

12. Thank You
• Questions & Discussions