Abhinav

International Monthly Refereed Journal of Research In Management & Technology

ISSN 2320-0073

Volume III, February14

LEVERAGE ANALYSIS OF AMUL ANAND MILK

UNION LIMITED, AHMEDABAD
Priyanka Sharma1, Ankit Saxena2 and Karishma Choudhary3
1

Research Associate, Pacific Institute of Management & Technology, Udaipur,

Rajasthan, India
Email: sharmapriyanka5389@gmail.com
Student, Pacific Institute of Management & Technology, Udaipur, Rajasthan, India
Email: 2ankitaman91@gmail.com, 3choudharykarishma3@gmail.com

ABSTRACT
The effect of financial leverage is studied both at a market and a firm level where the firm is
exposed to both individual and market risk. Financial leverage measures firms exposure to
the financial risk. A high level of financial leverage allows shareholders to obtain a high
return on equity, but they are also exposed to a higher risk of significant loss, if the return on
assets is lower. The financial leverage employed by a firm is intended to earn more on the
fixed charges funds than their relative costs. Leverage is a business term that refers to
borrowing .if a business is "leveraged" it means that the business has borrowed money to
finance the purchase of assets .the other way to purchase assets is through use of owner
funds or equity.
In this paper a comparative study and analysis of firms financial leverage, operating
leverage and combined leverage has been done of five years i.e. from 2007-08 to 2011-12.

Keywords: Financial Leverage; Operating Leverage; Combined Leverage; Risk;

Shareholders Return
INTRODUCTION
Leverage refers to the debt or the borrowing of the funds to finance the purchase of a
companys assets. Leverage is a business term that refers to borrowing .If a business is
"levered" it means that the business has borrowed money to finance the purchase of assets.
Purpose of leverage is to raise profits; a high degree of leverage gives a big push upward to
profits. If it properly used, it serves it purpose well and its effects are favorable.
Importance of leverage
It is acceleration of profits through changes in certain financial variables, which means
in turn that leverage is tool of profit planning.
Purpose of leverage is to raise profits; a high degree of leverage gives a big push
upward to profits. If it properly used, it serves it purpose well and its effects are
favorable.
Types of leverage
Operating leverage:-Operating leverage refers to the percentage of fixed costs that a
company has stated another. Way. Operating leverage is the ratio of fixed costs to variable
Available online on www.abhinavjournal.com

80

Abhinav
International Monthly Refereed Journal of Research In Management & Technology
ISSN 2320-0073

Volume III, February14

costs. If a business firm has a lot of fixed costs as compared to variable cost then the firm is
said to have high operating leverage. There are certain fixed expenses in business which do
not change with the level of output or sales. They remain constant in the short run. Due to
these expenses, operating profit increase more rapidly than the volume of sales. This knows
as operating leverage.
Financial leverage:-Financial leverage refers to the inclusion of securities carrying a fixed
financial burden such as debentures and preference share along with equity share Financial
leverage refers to the amount of debt in the capital structure of the business firm. If we
envision a balance sheet financial leverage refers to the right hand side of the balance sheet.
Financial leverage Refers to how the firm will pay for it or how the operation will be
financed.
Combined leverage: - the policy regarding capital structure should be framed keeping in
view the combined effect of operating leverage and financial leverage both. We have stated
the formulas to ascertain both leverages separately .combined or total leverage are the total
amount of risk facing a business firm. It can also be looked at in another way. It is the total
amount of leverage that we use magnifies the returns.
REVIEW OF LITERATURE
Asif and others (2011), investigated the impact of financial leverage output profit of share
and profitable change on dividend policy the results of this research show the negative
impact of financial leverage on dividend policy. In other words, dividend decreases
increasing the debts of company and the profitable changes don't affect the dividend policy
and profit output of shares affects dividend policy positively.
Alinaghyan (2010), investigated the confidence about cash flow stage of company age
antagonism of delegacy opportunities of investment profitability of company size of
company and company situation considering the cash flow as an influential factor on
dividend policy results show that among all the factors, non confident about cash flow stage
of company age opportunities of investment and company profitability are influential and
other factors are not affective.
Khoshtinat and hajian (2009), investigated the reactions of investors in the time of declaring
the increasing dividend by company. Because investor's reactions are reflected as the
purchase, selling and keeping share decisions and finally as the size of stock exchange
amount of stock exchange for the different temporal periods after declaring the increasing of
dividend policy of accepted companies in Tehran stock exchange were investigated.
Al-kowari (2009), scrutinizes the impact of state possessions, cash free flow, company size
growth ration. The results of his research show the positive relationship between state
possession company size profitability and dividend policy and also a negative relationship
between them and leverage ratio. He also said that companies pay profits for decreasing the
costs of delegacies and legal supporting of foreign shareholders.
Ling and other (2008), in a research on 100 accepted companies in Malaysian stock
exchange show that profitability of company's growth, leverage ratio, size of company
dispersion of shares are the determining factors in dividend policy. They found that
profitable and low-risk companies have more dividend policy than other companies.
Other researches in this field include Musa (2009),Aniland kapoor (2008), Nicholas Eriotis
(2008), Almalkawi (2007), Amidu and Abor (2006), Kubo and saito (2006) and kawalwiki
Available online on www.abhinavjournal.com

81

Abhinav
International Monthly Refereed Journal of Research In Management & Technology
Volume III, February14

ISSN 2320-0073

and other (2007). Olad hossein (2010) investigated the impact of the composition of the
director board. Output of assets. Cash free flow of each share. Business risk, size of company
growth opportunities and debt level on dividend proportion and probability of cash dividend
payout. Statical method sused in this paper involve tubit regression model and Lagit
regression model by synthetic data method. Other researches which are relevant to this
subject in Iran involve hashemi and akhlaghi(2010), purheidary and khaksari (2008), etemadi
and chalaki (2005), khajawi and nazemi (2005), bahram far and mehrani (2005), saghafi and
kordestani (2004), khadem (2001), shahmoradi(2001).
DATA ANALYSIS AND INTERPRETATION
Particulars
Years
NET SALES
ADD:INCOME
ADD:STOCK
ADJUSTMENT
TOTAL
LESS:VC
CONTRIBUTION
LESS:FC
EBDIT
LESS:DEPRECIATION
EBIT
LESS:INTEREST
EBT
LESS:TAX
EAT/PAT

2007-08
107187.29
1092.37

2008-09
137212.35
960.45

2009-10
168938.73
1179.54

Amount in Lakhs
2010-11
2011-12
210642.68 246634.7
1509.08
734.5

6524.07
114803.73
109134.37
5669.36
3820.26
1849.1
573.78
1275.32
814.81
460.51
9
451.51

2857.64
141030.44
134579.41
6451.03
3846.25
2604.78
802.18
1802.6
1122.07
680.53
105
575.53

-972.1
169146.17
160351.81
8794.36
5429.62
3364.74
1121.41
2243.33
1252.58
990.75
255
735.75

-2958.09
209193.67
199801.56
9392.11
5068.65
4323.46
1614.63
2708.83
1569.38
1139.45
212.78
926.67

Year
Operating Leverage
Financial Leverage
Combined Leverage

Available online on www.abhinavjournal.com

7560.82
254930.02
244352.15
10577.87
5191.53
5386.34
1891.72
3494.62
1441.25
2053.37
983.08
1070.29

2007-08
4.44
2.76
12.31

82

Abhinav
International Monthly Refereed Journal of Research In Management & Technology
ISSN 2320-0073

Available online on www.abhinavjournal.com

Volume III, February14

Year
Operating Leverage
Financial Leverage
Combined Leverage

2008-09
3.57
2.64
9.47

Year
Operating Leverage
Financial Leverage
Combined Leverage

2009-10
3.92
2.26
8.87

Year
Operating Leverage
Financial Leverage
Combined Leverage

2010-11
3.46
2.38
8.24

Year
Operating Leverage
Financial Leverage
Combined Leverage

2011-12
3.02
1.7
5.15

83

Abhinav
International Monthly Refereed Journal of Research In Management & Technology
Volume III, February14

ISSN 2320-0073

Year
2007-08
2008-09
2009-10
2010-11
2011-12

operating leverage
(O.L)
4.44
3.57
3.92
3.46
3.02

Financial leverage
(F.L)
2.76
2.64
2.26
2.38
1.7

Amount in Lakhs
Combined leverage
(C.L)
12.31
9.47
8.87
8.24
5.15

Interpretation
Operating Leverage
Operating Leverage of AMUL has decreased from 2007 to 2012. In the year 2007-08 it was
4.44 whereas is 2011-12 it has reduced and came down to 3.02.Since the ratio of fixed cost
to variable cost is low, AMUL has a low degree of operating leverage. The advantage of this
is that the company breakeven point will be quite low resulting in relatively low risk level
for the company.
In the year 2007 operating leverage was quite high as compared to 2012 which implies a
high fixed cost and low variable cost. Since the ratio of fixed cost and variable cost was high
the company was having a high degree of operating leverage in comparison to 2012.
Financial Leverage
Financial leverage has also shown a downward trend in last five years. It was 2.76 in the year
2007-08 whereas in 2011-12 it has come down to 1.7.
Financial leverage increases as the fixed financial expenses increases. Fixed financial
expenses refers to interest, as the financial leverage is decreasing in AMUL it shows that
interest expenses has ultimately decreased .as the ratio of debt in AMUL financial structure
has been decreased.
Combined Leverage
Degree of Combined leverage summarises the combined effect of degree of Operating
leverage and degree of financial leverage on earning per share. A firm with relatively high
degree level of combined leverage is seen more risky than the firm with less combined
leverage as high leverage means more fixed cost to the firm.

Available online on www.abhinavjournal.com

84

Abhinav
International Monthly Refereed Journal of Research In Management & Technology
ISSN 2320-0073

Volume III, February14

In above case the degree of combined leverage has reduced from 12.31 in 2007-08 to 5.15 in
2011-12.A low degree of combined leverage in AMUL shows the company is having low
fixed cost and is also a less risky firm.
CONCLUSION
From the above study it could be concluded that AMUL is a less riskier firm as compared to
its condition in 2007-08, as in 2007-08 its combined leverage was approx 12.31 which was
too risky for the firm but later on with a decrease in firms operating leverage and financial
leverage year by year it came down to 5.15 which is a good sign.
Low degree of leverage lead to a low risk level of the company. The operating leverage has
come down from 4.44 in 2007-08 to 3.02 in 2011-12 which implies a low fixed cost. The
financial leverage has also shown a decrement which shows that interest expenses has also
decreased.
REFERENCES
1. Asif,Aasia.Rasool,Waqas.Kamal,Yasir(2010)Impact of Financial Leverage on Dividend
Policy:Empirical Evidence from Karachi Stock Exchange-Listed Companies African
Journal of Business Management Vol. 5(4), pp. 1312-1324.
2. Alinaghyan, Nasrin.(2010). " Recognizing The affective Factors on Dividend Pay out in
Accepted Companies in Tehran Exchange Stock" .MA Thesis in Accounting. Economy
faculty. Isfahan University.
3. Al-Kuwari Duha (2009). " Determinants of the Dividend Policy in Emerging Stock
Exchanges:The Case of GCC Countries" Global Economy & Finance Journal Vol. 2 No.
2 PP. 38-63.
4. Figlewski, S., and X. Wang, 2000, Is the Leverage Effect a Leverage Effect?
Working Paper New York University.
5. Fischer, E., R. Heinkel, and J. Zechner, 1989, Dynamic Capital Structure Choice:
Theory andTests, Journal of Finance, 44, 1940.
6. Korajczk, R. A., and A. Levy, 2003, Capital Structure Choice: Macroeconomic
Conditions andFinancial Constraints, Journal of Financial Economics, 68, 75109.
7. Benjamin, M. Friedman (1985). Corporate Capital Structures in the United States:
Investment Patterns and Financial Leverage. University of Chicago Press. Volume
ISBN: 0-226-26411-4. (p. 325 - 352). Chapter Author: Michael S. Long; Ileen B. Malitz
8. Pandey, I.M. (2007). Financial Management. New Delhi: Vikas Publishing.
9. Hashemi and Akhlaghi (2010). "Impact of Financial Leverage, dividend policy and
profitability on Future Fitting of Company".Financial Accounting Journal. Second Year.
Number 6.38-49
10. Nikolaos Eriotis (2008), The Effect of Corporate Leverage on Dividend Policy :
Evidence From Greek Panel Data, Journal of financial research.
11. Modigliani, Franco and Merton H. Miller. 1958. .The Cost of Capital, Corporation
Finance and the Theory of Investment.. The American Economic Review 48(3):
261.297.

Available online on www.abhinavjournal.com

85