A STUDY ON “THE IMPACT OF FINANCIAL LEVERAGE ON A FIRM’S

PERFORMANCE AT SHREE ACCOUNTRICKS”

By

S. MARWIN JOSEPH
Reg. No.: 111923MB02050

A PROJECT REPORT

Submitted to the

FACULTY OF MANAGEMENT STUDIES

in partial fulfillment for the award of the degree

of

MASTER OF BUSINESS ADMINISTRATION

S.A. ENGINEERING COLLEGE

(AUTONOMOUS)

CHENNAI - 600 077

MARCH 2025
 BONAFIDE CERTIFICATE

Certified that the project report titled A STUDY ON “THE IMPACT OF FINANCIAL
LEVERAGE ON A FIRM’S PERFORMANCE AT SHREE ACCOUNTRICKS” is the
bonafide work of S. MARWIN JOSEPH Reg. No.: 111923MB02050 who carried out the
research under my supervision. Certified further, that to the best of my knowledge, the work
reported herein does not form part of any other project report dissertation based on which a degree
or award was conferred on an earlier occasion on this or any other candidate.

Signature of Supervisor Signature of the HOD

Mrs. V. Chandralekha Dr.V. ROHINI

ASSOCIATE PROFESSOR Head of the Department

Submitted to project Viva Voce held on ……………….

Internal Examiner External Examiner

 DECLARATION

I, S. MARWIN JOSEPH Reg. No.: 111923MB02050, IInd year MBA student of S. A.

ENGINEERING COLLEGE, Thiruverkadu, Chennai, hereby declares that the project entitled
“A STUDY ON THE IMPACT OF FINANCIAL LEVERAGE ON A FIRM
PERFORMANCE AT SHREE ACCOUNTRICKS” submitted for the M.B.A. Degree is my
original work under the guidance of [Link] MBA(PhD).., Department of
Management Studies, [Link] College (Autonomous), and the dissertation has not formed
the basis for the award of any degree, associate ship, fellowship or any other similar titles.

Place:

Date: Signature of the student

S. MARWIN JOSEPH
 ABSTRACT

The purpose of the research is to identify the relationship between financial leverage and the
performance of Sree Accountricks. For this, the researcher uses research design as analytical
research. Data are secondary data that consist of 5 years of data collected from 2018-2023 as a
sample, using Breakeven point to identify the result. The result shows that financial leverage
(ROE) has a negative value and significant effects on firms. The financial leverage shows that
ROA has a positive impact on firm performance. Further study explains the significance of equity
and debt in an organization. Suggestion to the company's financial performance. And discuss the
ratio.
 ACKNOWLEDGEMENT

Foremost, I thank the almighty without whose grace anything is possible. We are indebted to our
Founder Chairman late [Link], M.L.A., Chairman Thiru. [Link],
Secretary Thiru. D. DASARATHAN, Treasurer and Correspondent Thiru. [Link] and
Director Thiru. D. SABARINATH for providing generous opportunity, excellent environment and
infrastructure at S. A. ENGINEERING COLLEGE (Autonomous), Chennai.

I express our sincere gratitude to our Principal, Dr. [Link] for his
enthusiastic support and enlightening guidance.

I extend my thanks to our beloved Head of the Department, Dr. V. ROHINI for her
encouragement throughout the project. I would also like to thank [Link] MBA
(PhD), for guiding me in all works in a kind manner and Showing me the path to march towards
the successful finishing of this project.

I would also like to thank all the teaching and non-teaching staff of my institute for their
continuous support and encouragement.

I would like to express my thanks to Rakshan raaj Proprietor who has kindly permitted me
to undertake the project in the organization. I am also thankful to all the members of the
organization for their support and for providing the required information.

My hearty thanks to my parents and friends for their continuous support and
encouragement in the successful completion of the project.
 TABLE OF CONTENTS

CHAPTER NO. PARTICULARS PAGE NO

1 Introduction

1.1 Introduction 1

1.2 Scope of the study 8

1.3 Need for the study 9

1.4 Objectives of the Study 10

1.5 Research Methodology 11

2 Profiles

2.1 Industry profile 15

2.2 Company profile 22

3 Literature Survey

3.1 Conceptual and theoretical review 24

3.2 Research review 28

4 Data Analysis and Interpretation

4.1 Break Even analysis 41

4.2 Leverage Ratio 43

 4.2 Financial Leverage Index 44

5 Conclusions

5.1 Findings 51

5.2 Directions for further research 52

5.3 Limitations 53

5.4 Suggestions 54

5.5 Conclusion 55

Bibliography

Appendix
 LIST OF TABLES

TABLE NO PARTICULARS PAGE NO.

4.1.1 Table showing the Calculation of Debt-equity ratio 34

4.1.2 Table showing the Calculation of Solvency ratio 35

4.1.3 Table showing the Calculation of Proprietary ratio 37

4.1.4 Table showing the Calculation of Return on assets 38

4.1.5 Table showing the Calculation of Return on equity 40

 LIST OF CHARTS

CHART NO PARTICULARS PAGE NO.

4.1.1 Chart showing the calculation of Debt-equity ratio 35

4.1.2 Chart showing the calculation of solvency ratio 36

4.1.3 Chart showing the calculation of proprietary ratio 38

4.1.4 Chart showing the Return on asset 39

4.1.5 Chart shwoing the Return on equity 41

 CHAPTER 1
INTRODUCTION

1
1.1 INTRODUCTION

Financial leverage is named after a lever in physics, which amplifies a small input force into
a greater output force because successful leverage amplifies the smaller amounts of money
needed for borrowing into large amounts of profit. However, the technique also involves the
high risk of being unable to repay a large loan. Normally, a lender will limit how much risk it
is prepared to take and how much leverage it will permit. It would also require the acquired
asset to be provided as collateral security for the loan.
Leverage means Anything from a house purchase to stock market speculation that can be
financed with leverage. Leverage is frequently used by businesses to fund their expansion, by
families to buy homes through mortgage debt, and by financial professionals to strengthen
their investment plans. Sustainable Development Goal (SDG) 9-Company, Innovation, and
Infrastructure aims to "build resilient infrastructure, promote inclusive and sustainable
industrialization, and foster innovation." This goal is integral to driving long-term economic
growth, promoting equity, and combating climate change. Among the various factors
influencing the achievement of (SDG) 9-Company, Innovation, and Infrastructure Financial
leverage plays a critical role. By strategically utilizing financial leverage essentially borrowing
or using debt to increase the potential return on investment industries, governments, and
organizations can accelerate advancements in infrastructure development, innovation, and
industrial capacity.
The Role of Financial Leverage in Industry
Financial leverage is vital in industries seeking to scale operations and modernize their
infrastructure. Leveraged financing allows industries to acquire large amounts of capital,
which can be utilized to invest in advanced technologies, improve production capacity, and
expand operations. In the context of (SDG) 9-Company, Innovation, and InfrastructureThis
capital is particularly necessary for sustainable industrialization—ensuring that industries
adopt more efficient, environmentally friendly, and technologically advanced practices.
For example, in developing nations, financial leverage can support the expansion of green
industries, such as renewable energy or electric vehicles, which contribute to the reduction of
carbon emissions. These industries often require significant initial investment, which can be
difficult to secure without leveraging financing. By utilizing loans, bonds, or equity

2
investments, industries can make long-term investments in clean technologies, infrastructure
improvements, and sustainable practices, ultimately contributing to more resilient and
sustainable industrial development.
Leveraging Finance for Innovation
Innovation is at the core of (SDG) 9-Company, Innovation, and Infrastructureas technological
progress drives productivity improvements, new industries, and economic diversification.
Financial leverage can act as a catalyst for innovation, enabling businesses and startups to
fund research and development (R&D) efforts. Often, the costs associated with R&D are high
and require substantial capital, which makes financial leverage a valuable tool in fostering
technological breakthroughs. This is particularly important in areas such as clean energy,
biotechnology, and digital technologies, where innovation can have profound impacts on
sustainability and economic growth.
Moreover, venture capital and private equity financing, both forms of financial leverage, are
crucial for fostering the development of innovative startups. These startups can focus on
disruptive technologies, process innovations, and business models that align with sustainable
practices. For instance, startups developing next-generation battery technologies or innovative
recycling solutions can benefit from financial leverage to bring their products to market.
Infrastructure Investment and Financial Leverage
Infrastructure is foundational to achieving (SDG) 9-Company, Innovation, and Infrastructure
Developing resilient infrastructure—such as transportation networks, water systems, energy
grids, and digital infrastructure—requires substantial financial resources. Financial leverage
can help governments and private sector entities access the necessary funds to invest in large-
scale infrastructure projects. This is especially critical in low-income or developing countries,
where infrastructure deficits are most pronounced.
Leveraging financing through bonds, development loans, and public-private partnerships can
enable governments to develop essential infrastructure without straining public budgets.
Moreover, these investments can be designed to promote sustainable infrastructure, such as
energy-efficient buildings, smart cities, and low-carbon transport systems. Leveraged finance
can help ensure that infrastructure projects meet the needs of the population while aligning
with global sustainability standards.

3
 WHY LEVERAGE IS IMPORTANT?
As leverage in the financial field plays a vital role in running business operations in a day-to-
day manner. Even though it possesses the risk of obtaining more leverage accessibility. Here
below we discuss the importance of leverage in detail
1. Increased Return on Equity (ROE):
• By using debt to finance assets, a company can increase its total assets without increasing
its equity capital.
• This can lead to a higher return on equity, as the company can generate more profit on a
smaller equity base.
2. Boost up the Growth:
• Leverage can provide the necessary funds for expansion, acquisitions, or research and
development, enabling a company to grow at a faster pace.
• By borrowing money, a company can avoid diluting its ownership by issuing new equity.
3. Tax Benefits:
• Interest payments on debt are often tax-deductible, which can reduce a company's overall
tax liability.
• This can increase after-tax profits and enhance shareholder value.
4. convenient:

• Leverage can provide a company with greater financial flexibility, allowing it to adapt to
changing market conditions.
• For example, a company can use debt to finance a temporary downturn or to seize a time-
sensitive opportunity.
5. Market monitoring:

• In some cases, the use of debt can signal to the market that a company is confident in its
prospects.
• This can boost investor confidence and lead to a higher stock price

4
ADVANTAGES AND DISADVANTAGES OF FINANCIAL LEVERAGE:

ADVANTAGES DISADVANTAGES

Improved creditability Increased financial risk

Easy accessibility Agency costs

Lower in capital risk Limited flexibility

Expansion of business Difficult in repayment

Tax benefit Increased stress level

Increased Financial Risk: If a company cannot generate sufficient returns to cover its debt
payments, it may face financial distress or even bankruptcy.
Agency Costs: Excessive leverage can lead to agency conflicts between shareholders and
management, as managers may be incentivized to take on excessive risk to maximize their
compensation.
Limited Flexibility: A highly leveraged company may have less flexibility to respond to
unexpected events or to pursue new opportunities

BENEFITS OF FINANCIAL LEVERAGE:

Financial leverage can be beneficial in various factors, here I’m considering the major benefit
of diversification and expansion because these two are in the introduction and expansion stage
of a business cycle. It involves more of a cash generation process to run the business either in
promotion or expansion and diversify your product or services according to your customer
preferences because customers and competitors are different from one business to one
business, so in the introduction and development stages there is more cash inflow and outflow.
Here with the help of financial leverage, we can easily access the financial sources and it helps
reduce the fund-collecting stress.

5
 enhanced
in the
opportunity

positive
cash flow
flexibility

financial
leverage

tax benefit liquidity

management

diversification

In the realm of finance and investing, leverage is a powerful instrument that promises increased
returns and faster growth. However, the harsh reality of increased risks counterbalances its
attractiveness. This delicate balance between possible benefits and drawbacks emphasizes how
using leverage requires careful thought and risk management

6
RISK IN FINANCIAL LEVERAGE:

Investing in a company that has a lot of financial and operational leverage might be dangerous. A
company with significant operating leverage is likely to have high margins but few sales. If a
company predicts future sales incorrectly, this might present serious concerns. A substantial
difference between planned and real cash flow could result from a future sales projection that is
somewhat greater than the actual, which would have a big impact on a.

Thecompany’sabilitytooperateinthe future.

A company's return on equity and profitability are significantly reduced when its return on assets
(ROA) falls short of the loan interest. This is the largest risk associated with high financial
leverage.

7
1.2 SCOPE OF THE STUDY

• The scope of financial leverage on firm performance encompasses the various ways the
use of debt can impact a company's financial health and overall success. It involves
examining both the positive and negative consequences of leverage.

• It delves into both the potential benefits, such as amplified returns and optimized capital
structure, and the associated risks, including increased financial risk and vulnerability to
economic downturns. By examining key financial ratios, profitability metrics, and the
interplay between leverage and other financial factors, researchers can gain a
comprehensive understanding of how the use of debt impacts a firm's overall performance
and strategic positioning.

8
1.3 NEED OF THE STUDY

• Financial leverage enables you to keep investing even if the company is cash-strapped.
And it helps companies to create opportunities for investors to invest their money. it allows
the existing shareholders to keep their current level of control over the company as they
can raise funds by taking out loans rather than issuing new equity.

9
1.4 OBJECTIVE OF THE STUDY

• To study the impacts of financial leverage on firm performance.

• To offer the finding, suggestion, and conclusion from the analysis

• To determine how significantly ROA and ROE impact the firm performance

• To determine the value for the solvency ratio. ratio and debt-equity ratio

• To advise the finance manager on capital structure design

• To enhance the company’s potential and financial performance

10
1.5 RESEARCH METHODOLOGY

Research methodology is a way of explaining how a researcher intends to carry out their research.
It is a logical, systematic plan to resolve a research problem. a methodology details a researcher's
approach to the research to ensure reliable, valid results that address their aims and objectives. It
encompasses what data they are going to collect and where from, as well as how it's being collected
and analysed. There are various types of research designs are available. For this research, the
researcher used an analytical research design.

ANALYTICAL RESEARCH DESIGN

This research method involved methods like association of attributes, correlation, regression, etc,
which help in establishing functional relations between variables. An analysis is often used to
comparison between two variables or more in available set data only it doesn’t create any new data
set in the project it is used only on existing data in the project field.

TYPES OF DATA:

Data can be classified into two type’s primary and secondary data. For this research, the researcher
used secondary data. The researcher collected the past five years (2018-2023) Balance sheet
directly from the company.

STATISTICAL TOOL:
Break-Even Analysis:
Break-even analysis is a vital financial tool used by businesses to determine the point at which
total revenues equal total costs, resulting in neither profit nor loss. This point, known as the break-
even point (BEP), marks a crucial threshold for decision-making in pricing, budgeting,
investment, and operational planning. By understanding how changes in costs and sales volume
affect profitability, companies can better manage risk and optimize performance.
Whether you're launching a new product, entering a new market, or evaluating cost structures,
break-even analysis provides the clarity needed to make informed business decisions. This article

11
explores the concept, calculations, benefits, limitations, and practical applications of break-even
analysis in real-world business scenarios.

2. Concept of Break-Even Point

The break-even point is the level of sales at which a company’s total revenue equals total costs.
At this point, a business covers all its fixed and variable expenses but earns zero profit. Any sales
beyond the break-even point contribute to profit, while sales below it result in a loss.
Break-even analysis divides costs into two main categories:
• Fixed Costs: These are expenses that do not vary with production or sales volume (e.g.,
rent, salaries, insurance).
• Variable Costs: These change with the level of output or sales (e.g., raw materials, direct
labor, commissions).
The analysis helps in identifying how many units a business needs to sell or how much revenue it
needs to generate to "break even."

3. Formula for Break-Even Analysis

There are two common approaches to calculating the break-even point: in units and in sales
revenue.
Break-Even Point in Units:
Where:
• Contribution Margin (CM) = Selling Price – Variable Cost
• Contribution Margin Ratio (CMR) = CM / Selling Price
The contribution margin is crucial—it shows how much money is left after covering variable
costs to contribute toward fixed costs and profit.

12
INDEPENDENT VARIABLE:

• SOLVENCY RATIO

A solvency ratio is a financial metric that assesses a company's ability to meet its long-term debt
obligations. It's a key indicator of a company's financial health and is often used by lenders,
investors, and bankers to evaluate a business's creditworthiness.

• PROPRIETARY RATIO

A proprietary ratio is a type of solvency ratio that is useful for determining the amount or
contribution of shareholders or proprietors toward the total assets of the business. It is also known
as equity ratio shareholder equity ratio or net worth ratio.

• DEBT-EQUITY RATIO

A debt-to-equity (D/E) ratio is a financial metric that compares a company's total liabilities to its
shareholder equity. It's used to assess a company's financial health and stability, and to determine
if it's a good investment.

13
CHAPTER 2
PROFILE

14
2.1 INDUSTRY PROFILE
The financial services industry is a broad and dynamic sector that encompasses a wide
range of businesses and services, including banking, insurance, investment management, wealth
management, accounting, and other related services. It plays a critical role in supporting the
economy by facilitating the flow of capital, managing risk, and providing a range of solutions for
individuals, businesses, and governments. In this profile, we explore the key segments of the
financial services industry, its trends, growth drivers, challenges, and the evolving regulatory
landscape.

1. Overview of the Financial Services Industry

The financial services industry is integral to the functioning of both developed and
emerging economies. It provides the tools and infrastructure that allow individuals and businesses
to manage their money, protect assets, and access capital. This sector includes banks, insurance
companies, investment firms, pension funds, stock exchanges, and other entities involved in
facilitating financial transactions. The financial services industry is responsible for providing
liquidity to markets, managing financial risks, and helping individuals and corporations manage
their wealth.

The global financial services industry is vast and diverse, with companies ranging from
large multinational banks to small niche financial advisory firms. It is also rapidly evolving, driven
by technological advancements, changing customer expectations, and increasing regulatory
scrutiny.

2. Key Segments of the Financial Services Industry

2.1. Banking

Banking is the backbone of the financial services industry. Banks provide a range of
services, including savings and checking accounts, loans, credit facilities, and wealth management.
The banking sector is divided into retail banking, corporate banking, and investment banking.

• Retail Banking: Focuses on individual consumers and small businesses, offering products
such as savings accounts, personal loans, mortgages, and credit cards.

15
 • Corporate Banking: Provides financial products and services to businesses, including
working capital loans, business lines of credit, and cash management solutions.

• Investment Banking: Focuses on large corporations and institutional investors, providing

services such as mergers and acquisitions (M&A), capital raising, underwriting, and
advisory services.

2.2. Insurance

The insurance industry provides risk management solutions by offering policies that protect
individuals and businesses from potential financial losses. Insurance products include life
insurance, health insurance, property insurance, and casualty insurance. The key players in the
insurance industry are life insurance companies, health insurers, and general insurers.

• Life Insurance: Covers financial protection for individuals and their families in the event
of death, disability, or illness.

• Health Insurance: Provides coverage for medical expenses incurred due to illness, injury,
or medical emergencies.

• General Insurance: Includes property, automobile, and casualty insurance policies that
help protect assets from loss, theft, or damage.

2.3. Investment Management

Investment management involves the professional management of assets such as stocks,

bonds, real estate, and private equity. This segment includes asset management firms, hedge funds,
mutual funds, and private equity firms. Investment managers allocate capital to a variety of assets
to meet the investment objectives of their clients, which include individuals, pension funds,
endowments, and institutional investors.

• Asset Management: Involves managing a portfolio of assets on behalf of clients to achieve

specific financial goals.

• Hedge Funds: Pooled investment funds that employ advanced strategies to generate high
returns for investors.

16
 • Private Equity: Involves investing in privately held companies or taking public companies
private to restructure and grow them for profit.

2.4. Wealth Management and Financial Advisory

Wealth management is a personalized service offered to high-net-worth individuals

(HNWIs) and ultra-high-net-worth individuals (UHNWIs). Wealth managers provide
comprehensive financial advice, including investment strategies, retirement planning, tax
optimization, and estate planning. This sector also includes financial advisors who provide general
financial planning and advice to a broader customer base.

• Financial Planning: Helps individuals plan their financial future, including budgeting,
saving for retirement, and achieving financial goals.

• Tax Optimization: Involves advising clients on strategies to minimize tax liabilities while
remaining compliant with tax regulations.

• Estate Planning: Helps individuals plan the distribution of their assets after death to
minimize taxes and ensure that beneficiaries are properly provided for.

2.5. Capital Markets

Capital markets provide a platform for buying and selling financial securities such as stocks
and bonds. They facilitate the flow of capital from investors to businesses and governments that
need funding for growth and expansion. Capital markets include both primary markets (where new
securities are issued) and secondary markets (where existing securities are traded).

• Equity Markets: Involve the buying and selling of stocks and shares of publicly traded
companies.

• Bond Markets: Involve the issuance and trading of debt securities, including government
bonds, corporate bonds, and municipal bonds.

• Derivatives Markets: Include financial instruments such as options, futures, and swaps
that derive their value from underlying assets like stocks, commodities, or interest rates.

17
 2.6. Accounting and Tax Services

Accounting and tax services form a critical part of the financial services industry, helping
businesses and individuals manage their financial records, ensure compliance with tax laws, and
optimize their tax positions. Accountants provide services such as financial reporting, auditing, tax
preparation, and advisory. Tax consultants and accountants help clients minimize their tax
liabilities while ensuring adherence to tax regulations.

• Audit Services: Involves the independent examination of financial statements to ensure

their accuracy and compliance with accounting standards.

• Tax Filing and Compliance: Includes services for individuals and businesses to ensure
proper filing of tax returns and compliance with local tax laws.

• Financial Reporting: Helps businesses prepare accurate financial statements that reflect
the true financial position of the company.

3. Industry Trends and Growth Drivers

The financial services industry is currently undergoing a significant transformation, driven

by various trends and emerging technologies. These changes are reshaping the way financial
institutions operate and deliver services to their clients.

3.1. Technological Advancements

Technology has revolutionized the financial services industry, making processes faster,
more efficient, and customer-centric. Key technological trends include:

• Fintech: Financial technology (fintech) companies are disrupting traditional financial

institutions by offering innovative products and services, such as mobile payments, peer-
to-peer lending, robo-advisory, and digital wallets.

• Blockchain and Cryptocurrency: Blockchain technology is revolutionizing payments,

securities trading, and financial transactions by offering a secure, transparent, and
decentralized method of recording transactions. Cryptocurrencies like Bitcoin and
Ethereum are gaining popularity as alternative investments and payment systems.

18
 • Artificial Intelligence (AI) and Machine Learning: AI and machine learning are being
used to enhance customer experiences, detect fraud, optimize investment strategies, and
automate routine tasks.

3.2. Regulatory Changes

Financial services are heavily regulated to ensure transparency, protect consumers, and
maintain financial stability. Regulatory bodies, such as the U.S. Securities and Exchange
Commission (SEC), the Federal Reserve, and the European Central Bank (ECB), set the rules and
guidelines for the financial industry. Increasingly complex regulations and compliance
requirements are influencing the way financial institutions operate.

• Data Protection Regulations: With the growing volume of data being generated, the need
for strong data protection and privacy regulations, such as the European Union's General
Data Protection Regulation (GDPR), is rising.

• Basel III and Capital Adequacy: Regulatory frameworks like Basel III set higher capital
and liquidity requirements for banks, ensuring their ability to absorb economic shocks and
avoid financial crises.

• Anti-Money Laundering (AML) and Know Your Customer (KYC): Financial

institutions are required to implement AML and KYC procedures to prevent fraud, money
laundering, and terrorism financing.

3.3. Shifting Consumer Expectations

Consumer expectations are changing, with a growing demand for convenience,

transparency, and personalized services. Financial institutions are increasingly focusing on
delivering customer-centric products that cater to the needs of both individuals and businesses.

• Digitalization: Consumers are expecting to be able to manage their finances online, access
services through mobile apps, and engage with companies via digital channels.

• Personalization: Customers are looking for personalized financial advice and products
tailored to their specific needs and financial goals.

19
 3.4. Globalization

The financial services industry is becoming increasingly globalized, with financial

institutions expanding their operations across borders. This globalization provides both
opportunities and challenges, as businesses gain access to new markets but also face increased
competition and regulatory complexity.

• Cross-Border Investment: As markets become more interconnected, investors are able to

diversify their portfolios by investing in global markets, including emerging economies.

• Global Payment Systems: The demand for cross-border payment solutions has increased
with the rise of international trade, e-commerce, and remittances.

4. Challenges Facing the Financial Services Industry

While the financial services industry is poised for growth, it faces several challenges that
could impact its future development.

4.1. Cybersecurity Threats

As financial services become more digitized, the risk of cyberattacks and data breaches
increases. Financial institutions must invest heavily in cybersecurity measures to protect sensitive
customer data and ensure the security of financial transactions.

4.2. Regulatory Compliance

The ever-evolving regulatory landscape is a significant challenge for financial institutions,

which must comply with a growing number of national and international regulations. Failure to
comply can result in fines, penalties, and reputational damage.

4.3. Market Volatility and Economic Uncertainty

Financial markets are often volatile, influenced by macroeconomic factors such as

inflation, interest rates, and geopolitical risks. Financial institutions must adapt to these market
fluctuations and manage risks effectively to safeguard their operations and assets.

20
 The financial services industry is an essential component of the global economy, providing
a wide array of services that help individuals, businesses, and governments manage their finances,
invest, and protect their assets. While the industry faces challenges such as cybersecurity threats
and regulatory compliance, it is also undergoing significant transformation driven by technological
advancements, shifting consumer expectations, and globalization. Financial institutions that
embrace innovation, focus on customer-centric solutions, and adapt to regulatory changes will be
well-positioned to thrive in the evolving financial landscape.

21
 2.2 COMPANY PROFILE

CompanyName: SHREEACCOUNTRICKS
Industry: FinancialServices
Core Services: GST Filing, Taxation, Accounting, Financial Consulting

Overview

SHREE ACCOUNTRICKS is a trusted financial services provider specializing in a wide

range of accounting and taxation services. We focus on helping businesses navigate the
complexities of the financial world with accuracy and efficiency. Established with a mission to
simplify finance, SHREE ACCOUNTRICKS offers expert GST filing services, tax solutions, and
comprehensive accounting services that ensure compliance, transparency, and growth for our
clients.

We cater to businesses of all sizes—small startups to large corporations—delivering

solutions tailored to their specific needs. With an emphasis on accuracy, timeliness, and customer
satisfaction, SHREE ACCOUNTRICKS aims to build long-term relationships based on trust and
professionalism.

Core Services

1. GSTFiling&Returns:
Our team of experts assists businesses in timely and accurate filing of Goods and Services
Tax (GST) returns. We ensure compliance with the latest GST rules, handle monthly,
quarterly, and annual filings, and resolve any GST-related queries.

2. TaxationServices:
We provide personalized tax planning, consultancy, and compliance services. From
income tax filing to helping businesses reduce their tax liabilities, we ensure that clients
benefit from every available tax-saving opportunity while remaining fully compliant.

22
 3. AccountingServices:
SHREE ACCOUNTRICKS offers expert accounting services, including bookkeeping,
preparation of financial statements, balance sheets, and profit & loss statements. Our team
ensures that all your financial records are accurate, up-to-date, and ready for audit.

4. FinancialConsulting&Advisory:
Our financial consultants provide strategic guidance in managing finances, investments,
and business growth. Whether it’s improving cash flow, investment planning, or helping
with business restructuring, we offer actionable insights tailored to your specific goals.

5. BusinessSetup&Compliance:
We guide new businesses through the process of incorporation, obtaining necessary
licenses, and ensuring they comply with regulatory requirements right from the start. This
includes GST registration, PAN/TAN registration, and other legal requirements.

Our Approach

At SHREE ACCOUNTRICKS, we believe in a proactive, hands-on approach to financial

services. Our team stays updated on the latest financial regulations, industry trends, and best
practices, ensuring that our clients receive accurate, up-to-date, and relevant advice. Whether it’s
simplifying tax filings or streamlining accounting processes, we are dedicated to providing
solutions that promote business growth, operational efficiency, and long-term financial success.

Why Choose SHREE ACCOUNTRICKS?

• Expertise: Our team consists of highly qualified professionals with years of experience in
taxation, accounting, and financial consulting.

• Accuracy & Compliance: We ensure that all filings and financial documents comply with
the latest laws and regulations.

• Customer-Centric Approach: We take the time to understand the unique needs of each
client and offer personalized solutions.

• Timely Service: Our team is committed to meeting deadlines, ensuring your financial
matters are taken care of promptly and efficiently.

23
 CHAPTER 3
LITERATURE SURVEY

24
 3.1 CONCEPTUAL AND THEORETICAL REVIEW

Introduction

Financial leverage, defined as the use of debt to finance a company’s operations, plays a pivotal
role in shaping a firm’s performance. While debt can amplify returns by providing additional
capital for growth and expansion, it also introduces risk. The theoretical underpinnings and
empirical evidence on the relationship between financial leverage and firm performance have been
widely studied, with mixed results. This review outlines the key concepts, theories, and empirical
findings related to the impact of financial leverage on firm performance.

Financial Leverage: Concept and Measures

Financial leverage is a strategy where a firm uses debt in its capital structure to finance its
operations. The primary goal is to enhance returns on equity by using borrowed funds to generate
higher profits. However, leverage also increases financial risk since debt payments must be met
regardless of business performance.

Common measures of financial leverage include:

• Debt-to-equity ratio (D/E): A ratio that compares the firm’s debt to its equity.
• Debt ratio: The proportion of total assets financed by debt.
• Interest coverage ratio: A measure of the firm’s ability to meet interest obligations from
its earnings.

These ratios help assess how much risk the firm is taking on by relying on debt.

Theoretical Perspectives on Financial Leverage and Firm Performance

1. Modigliani-Miller Theorem
The Modigliani-Miller theorem (1958) posits that, under perfect market conditions (i.e., no taxes,
bankruptcy costs, or information asymmetries), a firm’s value and performance are unaffected by its
capital structure. According to this view, leverage does not impact firm performance, as investors can
adjust their portfolios to match the desired level of risk. However, in the real world,

25
markets are imperfect, and the assumptions of the M&M theorem do not hold, prompting further
exploration into the impact of financial leverage.

2. Trade-Off Theory

The trade-off theory suggests that firms balance the tax benefits of debt with the costs of financial
distress (i.e., the risk of bankruptcy and operational disruption). Debt provides a tax shield because
interest payments are tax-deductible, increasing firm value. However, as leverage increases, the
likelihood of financial distress also rises, potentially harming firm performance. Therefore, the
theory proposes an optimal capital structure where the marginal benefits of debt equal its marginal
costs.

3. Pecking Order Theory

The pecking order theory, developed by Myers and Majluf (1984), argues that firms prefer internal
financing (retained earnings) over external financing, and if external financing is needed, debt is
chosen over equity. This theory implies that firms with high leverage may experience
underperformance, as over-reliance on debt may constrain flexibility and increase the firm’s
financial risk. It suggests that firms with high leverage ratios may be less profitable, as they
prioritize meeting debt obligations over reinvesting in their business.

4. Agency Theory

Agency theory explores the conflicts between stakeholders, particularly managers and
shareholders, and managers and debt holders. High financial leverage can reduce agency costs by
aligning the interests of shareholders and creditors, as both parties benefit from the firm’s ability
to generate cash flows. However, excessive debt can exacerbate agency problems. Managers may
engage in risk-averse behavior to avoid financial distress, which may stifle firm performance.
Alternatively, equity holders may undertake high-risk projects that benefit them but increase the
risk for debt holders.

26
Empirical Evidence on Financial Leverage and Firm Performance

Empirical research on the relationship between financial leverage and firm performance has
produced mixed findings. The relationship is often context-dependent and influenced by factors
such as industry, firm size, and market conditions.

• Positive Relationship: Some studies find that moderate levels of leverage can improve
firm performance by enabling firms to take advantage of tax shields and access additional
capital. This is particularly evident in firms with stable cash flows and in industries where
debt is common, such as utilities.
• Negative Relationship: Other research shows that high levels of leverage can negatively
affect firm performance. Excessive debt increases the risk of financial distress, reduces
financial flexibility, and may force firms to focus on short-term survival rather than long-
term growth. The costs associated with bankruptcy, such as loss of reputation and
operational disruptions, can outweigh the benefits of leverage.
• Non-linear Relationship: Many studies find that the relationship between financial
leverage and firm performance is non-linear, often resembling a U-shape. Initially, as
leverage increases, firm performance may improve due to the benefits of tax shields and
capital access. However, beyond a certain threshold, further increases in leverage can harm
performance due to the rising costs of financial distress.

27
 3.2 RESEARCH REVIEW

1. According to Rahul Nandi and Pradipta Banerjee,(2024) the purpose of the study is to
determine whether the effects the profit of the firm and value of the firm the data have been
collected from NIFTY listed companies in India with the help of regression, descriptive
statistics, correlation and conclude with the financial leverage has inversely associated with
profitability, while financial leverage is positively but not significantly associated with
value of firm.
2. According to Kate Ming Jie Ji a, Juan Xi Wang b, Luca Boccard c, Howard Brown
d, IpKin Anthony Wong e, Jiao Wu f, (2024) the purpose of the study is to identify how
financial leverage interactive with hotel management companies and franchises by using
quantile Tobin's formula and conclude it with clarify the impacts of asset-light strategies
by differentiating the previously discovered U-shaped impact into a U-shape for
management contracts and an inverted U-shape for franchising. Furthermore, when
financial leverage is introduced, the above relationships are held at a low leverage level;
but are weakened at an important level. Lastly, these U-shapes are asymmetrical, being
more responsive to asset-light strategies than when there is no leverage interaction. This
research hence clarifies agency costs and their relevance to asset-light strategies with
varying financial leverage.
3. According to H M Sifullah, Parvin Akater Shelly, Dr. Mohammad Nazim Uddin,
Tanbina Tabassum, and Md Ahsan Uddin, (2024) the study is to examine the impact of
determinants of leverage on financial performance of pharmaceutical companies in
Bangladesh. This study covers a dataset of 24 companies, which are chosen based on their
availability of data. The study sets 13 variables of 3120 observations for 10 years, panel
linear models using robust tests. We find that the impact of debt-equity on financial
performance (EPS) is significant, and its connection is negative.
4. According to Soffia Pudji Estiasih, Martha Suhardiyah, Suharyanto Suharyanto,
Andhika Cahyono Putra, Puri Setioningtyas Widhayani, (2024) The study aims to
determine and analyze the influences of leverage. The sample is collected from ISE-listed
companies and analyzed with the help of the partial least square method and the finding
This research implies that food and beverage companies need to develop financial
strategies to improve their financial performance by increasing their leverage.

28
5. According to Irwan Moridu, (2024) This study aims to investigate the effect of financial
leverage, which's measured through the debt-to-debt-to-asset ratio (DAR) and Debt to
Equity Ratio (DER), on return on assets (ROA) in food and beverage sector companies
indexed at the Indonesia stock change (BEI). At some stage in the 2017-2021 period.
Financial report records from 14 corporations selected for the usage of the purposive
sampling technique were analyzed via a couple of linear regressions. The study's results
show that the DAR ratio does not have an extensive effect on ROA, while the DER ratio
has a giant high quality that influences ROA. This research presents a critical perception
of capital structure management and its effect on an organization's financial performance
amidst the dynamics of the food and beverage industry.
6. According to Senan, Nabil Ahmed Mareai Ahmad, AnwarAnagreh, Suhaib Tabash,
Mosabi Al-Hamad, Eissa A(2021) The purpose of this paper is to examine the
determinants of financial performance, firm liquidity, and financial leverage of Indian
listed firms. This study uses both static models (pooled, fixed, and random effects) and
Generalized Moment Methods (GMM). Financial leverage (FINLE) is defined by the ratio
of total liabilities to total assets, whereas the current ratio and the quick ratio are used as
firm liquidity factors. Further, a set of financial performance determinants such as return
on assets, profit after tax, return on capital employed, ROE, and Tobin-Q are used as
independent factors. The results indicated that profit after tax, ROE, return on capital
employed, and Tobin-Q are the most significant financial success variables that influence
the financial leverage of Indian-listed companies. Furthermore, profit after tax, return on
capital invested, ROE, and Tobin-Q are considered to have a substantial effect on financial
leverage among the financial success indicators.
7. According to Bassam M. Abu-Abbas, Turki Alhmoud, Fatima A. Algazo. (2019) This
study aims to identify the relationship between financial leverage and financial
performance Data is subjected to pooled General Least Square to test the hypotheses of
the study. Based on a sample from the Amman Stock Exchange, the study finds that
financial leverage has a negative relationship with the firm performance proxies by ROA
and EVA.

29
 In addition, the relationship between financial leverage and performance is more negative
for the firms that use product differentiation strategy compared with the firms that use
low-cost strategy and for the firms with a high degree of competitiveness compared with
the firms with a low degree of competitiveness. Different tests including the Wald F-test
on the linear restrictions support confirming the above conclusions.

8. According to Zaher Abdel Fattah AI-slehat, (2019) The present study aims to reveal
the financial leverage, Size, and asset structure and its impact on the values of firms. The
researcher used the analytical method approach for a sample of 13 firms from the mining
and extraction industry sector listed on the Amman stock exchange for the period 2010-
2018. The model of simple line regression was used for testing the hypotheses of the study
by using both programs (E-views, STATA) in addition to both programs of unit root test
and variance inflation factor to make sure of the data stability and no relationship between
variables
9. According to Oyakhilome W. Ibhagui, Felicia O. Olokoyo’ (2018) Accordingly, with
a panel data of 101 listed firms in Nigeria, we explore whether the ultimate effect of
leverage on firm performance is contingent on firm size; that is, whether the type of impact
that leverage has on the performance of a firm is dependent on the size of the firm. Our
results show that the negative effect of leverage on firm performance is most eminent and
significant for small-sized firms and that the evidence of a negative effect diminishes as a
firm grows, eventually vanishing when firm size exceeds its estimated threshold level. We
find that this result continues to hold, irrespective of the debt ratios utilized. In line with
earlier studies, our results show that the effect of leverage on Tobin’s Q is positive for
Nigeria’s listed firms. However, our new finding is evidence that the strength of the
positive relationship depends on the size of the firm and is mostly higher for small-sized
firms
10. According to Umer Iqbal's (2018) this study aims to identify the relationship between
financial leverage and the performances of textile companies in Pakistan Companies that
are listed in PSX (100-index) are selected.5-year data is collected from 2011-2015 and the
top 16 companies are selected as a sample. Using descriptive statistics, correlation
analysis, and a regression model to identify the results. Results show that financial

30
 leverage has a negative and significant effect on firm ROE and financial leverage has a
positive and significant effect on firm ROA
11. According to Dr. Sanjay J. Bhayani and Dr. Butala Ajmera, (2018) this study aims to
find the empirical relationship between financial leverage and pharmaceutical companies
over five years, by using four different models of regression. The result of the regression
explained that financial leverage has a negative but insignificant impact on Tobin's Q and
financial leverage has a positive but insignificant impact on enterprise value. The impact
of financial leverage on ROA is positive and insignificant. The impact of financial
leverage on EVA is negative and insignificant. Thus, it is concluded that financial leverage
has an insignificant impact on the financial performance and valuation of firms
12. According to Adenugba, Adesoji Adetunji IGE, kesinro, (2016) the main objective of
the study is to determine the relationship between financial leverage and firms’ value, as
well as evaluate the effect of financial leverage on firms’ value. A sample of 5 firms listed
on the Nigerian Stock Exchange (NSE) for 6 years from 2007-2012 was used. Data was
sourced from annual reports of selected firms by using ordinary least squares. The study
revealed that there is a significant relationship between financial leverage and firms’ value
and that financial leverage has a significant effect on firms’ value. The study concludes
that financial leverage is a better source of finance than equity to firms when there is a
need to finance long-term projects.
13. According to Iiyukhin. E, (2015) the aim of the study relationship between financial
performance. The samples are collected from Russian joint stock companies. Using
descriptive statistics. The result of financial leverage has been negatively impacting
Russian companies.
14. According to John Obradovish and Amarijt Gill,(2013) the studies to examine the
impact of financial leverage in American firms, the sample are collected over 333 firms
listed in NYSE in American companies over three years. With the help of regression,
Tobin’s Q model and the result shown is financial leverage, firm size, and insider holdings
positively impact the value of American manufacturing firms. Findings also show that
board size negatively impacts the value of American service firms, and financial leverage
and return on assets positively impact the value of American service firms

31
15. According to Amarjit Singh Gill, Harvinder Singh Mand, Suraj [Link], and Neil
Mathur, (2012). The study aims to find the factors that influence the financial leverage
of small businesses. The findings of this paper show that small business growth, small
business performance, total assets, sales, tax, and family have a positive influence on the
financial leverage of small business firms in India. This study contributes to the literature
on the factors that influence the financial leverage of small business firms.

32
 CHAPTER 4

DATA ANALYSIS AND INTERPRETATION

33
4.0 DATA ANALYSIS AND INTERPRETATION

Table 4.1.1 Calculation of Debt-equity ratio

Total liabilities
DER =Shareholder′ s equity

Basis 2018-2019 2019-2020 2020-2021 2021-2022 2022-2023

22260312 27485120 56009694 73102264 71524961.74

1000000 1000000 1000000 5000000 1000000
DER

=22.26 =27.48 =56.00 =14.62 =71.52

FINDINGS:

Here the ratio is calculated for the past five years of Sree Accountricks. From the above table in
2018-19 (22.26) of debt-equity ratio, 2019-20(27.48) of debt-equity ratio, 2020-21(56.00) of debt-
equity ratio, 2021-22(14.62), and 2022-23(71.52) of debt-equity ratio are founded.

INFERENCES:

According to the figure below, it was at22.6 in 2018but increased to 71.52 in the year of 2023. It
indicates that the debt-to-equity ratio is rising

34
Table 4.1.1 Chart showing the debt-equity ratio movement

Debt-equity ratio

80
70 71.52
60
56
50
40
30 27.48
20 22.26
14.62
10
0
2018-2019 2019-2020 2020-2021 2021-2022 2022-2023

Table 4.1.2 Calculation of Solvency Ratio:

Total debt
SR =Total assets

Basis 2018-2019 2019-2020 2020-2021 2021-2022 2022-2023

SR 1259665 1785521 22470606 35441368 12898536.81

27485120 22260312 56009694 73102264 71524961.74

=0.0458 =0.0802 =0.4011 =0.4848 =0.1803

35
FINDINGS:

Here the ratio is calculated for the past five years of Sree Accountricks. From the above table in
2018-19 (4.58) of Solvency ratio, 2019-20(8.02) of Solvency ratio, 2020-21(40) of Solvency ratio,
2021-22(48), and 2022-23(18) of Solvency ratio are founded.

INFERENCES:

According to the figure below, it was at 0.0458 in 2018 but slightly increased to 0.1803 in the year
of 2023. It indicates that the solvency ratio is rising.

Table 4.1.2 Chart Showing Solvency Ratio

solvency ratio
0.4848

0.5
0.45
0.4
0.35
0.3
0.25 0.1803
0.2
0.15 0.0458 0.0802
0.1 0.0411
0.05
0
2018-2019 2019-2020 2020-2021 2021-2022 2022-2023

36
Table 4.1.3 Calculation of Proprietary Ratio

Equity
PR= total assets

Basis 2018-2019 2019-2020 2020-2021 2021-2022 2022-2023

PR 1000000 1000000 1000000 5000000 1000000

22260312 27485120 56009694 73102264 71524961.74

=0.44 =0.36 =0.17 =0.68 =0.13

FINDINGS:

Here the ratio is calculated for the past five years of Sree Accountricks. From the above table in
2018-19 (44) of Proprietary ratio, 2019-20(36) of Proprietary ratio, 2020-21(17) of Proprietary
ratio, 2021-22(68), and 2022-23(13) of Proprietary ratio are founded.

INFERENCES:

According to the figure below, it was at 0.44 in 2018 but dramatically decrease to 0.13 in the year
of 2023. It indicates that the proprietary ratio is more inflation.

37
Table 4.1.3 Chart Showing Proprietary Ratio

propreitary ratio

2022-2023 0.13

0.68
2021-2022

2020-2021 0.17

2019-2020 0.36

2018-2019 0.44

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

Table 4.1.4 Calculation of Return on Assets

Net profit
ROA =Total assets

Basis 2018-2019 2019-2020 2020-2021 2021-2022 2023-2024

ROA 4720776 5428753 4645067 3186628.53 881386.93

22260312 27485120 56009694 73102264 71524961.74

=0.212 =0.197 =0.082 =0.043 =0.123

38
FINDINGS:

Here the ratio is calculated for the past five years of Sree Accountricks. From the above table in
2018-19 (2.12) of Return on assets, 2019-20(1.97) of Return on assets, 2020-21(0.8) of return on
assets, 2021-22(4.3), and 2022-23(1.2) of return on assets are founded.

INFERENCES:

According to the figure below, it was at 0.212 in 2018 but very slow improvement to 0.123 in the
year of 2023. It indicates that the return on assets is more stable.

Table 4.1.4 Chart Showing Return on Assets

Return on assets
0.212 0.197 0.082 0.043 0.123

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2018-2019 2019-2020 2020-2021 2021-2022 2022-2023

39
Table 4.1.5 Calculation of Return on Equity

Net profit
ROE= Equity

Basis 2018-2019 2019-2020 2020-2021 2021-20222 2022-2023

ROE

4720776 5428753 4645067 3186628.53 881386.93

100000 100000 100000 500000 100000

=47.20 =54.28 =46.45 =6.373 =8.813

FINDINGS:

Here the ratio is calculated for the past five years of Sree Accountricks. From the above table in
2018-19 (47.20) of Return on equity, 2019-20(54.28) of Return on equity, 2020-21(46.45) of
Return on equity, 2021-22(6.373), and 2022-23(8.813) of Return on equity are founded.

INFERENCES:

According to the figure below, it was at 47.2 in 2018 but very slow improvement in the year from
2022 to 2023. 6.373 and 8.813 respectively. It indicates that the return on equity is in the growing
stage

40
Table 4.1.5 Chart Showing Return on Equity

Return on equity

60 54.28
47.2 46.45
50

40

30

20
8.813
6.373
10

0
2018-2019 2019-2020 2020-2021 2021-2022 2022-2023

4.1 BREAK-EVEN ANALYSIS

1. Introduction

Break-even analysis is a vital financial tool used by businesses to determine the point at which
total revenues equal total costs, resulting in neither profit nor loss. This point, known as the break-
even point (BEP), marks a crucial threshold for decision-making in pricing, budgeting, investment,
and operational planning. By understanding how changes in costs and sales volume affect
profitability, companies can better manage risk and optimize performance.

Whether you're launching a new product, entering a new market, or evaluating cost structures,
break-even analysis provides the clarity needed to make informed business decisions. This article
explores the concept, calculations, benefits, limitations, and practical applications of break-even
analysis in real-world business scenarios.

41
Concept of Break-Even Point

The break-even point is the level of sales at which a company’s total revenue equals total costs. At
this point, a business covers all its fixed and variable expenses but earns zero profit. Any sales
beyond the break-even point contribute to profit, while sales below it result in a loss.

Break-even analysis divides costs into two main categories:

• Fixed Costs: These are expenses that do not vary with production or sales volume (e.g.,
rent, salaries, insurance).

• Variable Costs: These change with the level of output or sales (e.g., raw materials, direct
labor, commissions).

The analysis helps in identifying how many units a business needs to sell or how much revenue it
needs to generate to "break even."

Formula for Break-Even Analysis

There are two common approaches to calculating the break-even point: in units and in sales
revenue.

Break-Even Point in Units:

• Contribution Margin (CM) = Selling Price – Variable Cost

• Contribution Margin Ratio (CMR) = CM / Selling Price

The contribution margin is crucial—it shows how much money is left after covering variable costs
to contribute toward fixed costs and profit.

42
4.2 LEVERAGE RATIO

In the complex landscape of corporate finance, leverage plays a pivotal role in shaping a
company’s financial structure and strategy. Leverage refers to the use of borrowed capital to
finance business activities, investments, or growth. While leveraging can amplify returns, it also
introduces a degree of financial risk, particularly if the company is unable to meet its debt
obligations. To assess and manage this risk, financial analysts and stakeholders rely on a set of
tools known as leverage ratio coverage metrics.

Leverage ratio coverage refers to a group of financial ratios that help evaluate a company's ability
to service its debt. These ratios offer insight into a company’s capital structure, operational
efficiency, and financial health. Understanding leverage ratio coverage is essential for stakeholders
such as investors, creditors, and management, as it helps them make informed decisions about
financing, investing, and risk management.

This paper delves into the key concepts, types, significance, interpretation, and limitations of
leverage ratio coverage, offering a comprehensive overview suitable for students, professionals,
and business decision-makers.

The Concept of Leverage

Before diving into leverage ratios, it is essential to understand the broader concept of leverage.
Financial leverage refers to the use of debt in a company’s capital structure. When a company
borrows funds—whether through loans, bonds, or other instruments—it increases its potential for
return on equity, assuming the borrowed capital is used effectively. However, this comes at the
cost of increased financial obligations, including interest payments and principal repayment.

Leverage becomes a double-edged sword: it can magnify profits when used wisely, but it can also
lead to financial distress if revenues fall short or if the business faces unforeseen challenges.

43
4.2 FINANCIAL LEVERAGE INDEX

The Financial Leverage Index (FLI) is a useful metric that illustrates the impact of debt on a
company's return on equity (ROE) compared to its return on assets (ROA). It is calculated by
dividing ROE by ROA and helps determine whether the use of financial leverage is enhancing or
diminishing shareholder value. An FLI greater than 1 indicates that the company is effectively
using debt to amplify returns to equity holders, while an FLI less than 1 suggests that leverage is
reducing those returns, potentially due to high interest costs or inefficient capital use. This ratio is
particularly valuable when analyzing companies in capital-intensive industries where borrowing
is common, as it provides insight into how well a company is managing its debt to generate
additional value for its shareholders. However, while a high FLI may signal strong financial
performance, it also implies greater risk, emphasizing the importance of balancing leverage with
the ability to sustain debt obligations over time.

The Financial Leverage Index (FLI) is a key financial metric used to assess the influence of debt
on a company’s ability to generate returns for its shareholders. It compares two important
profitability ratios—Return on Equity (ROE) and Return on Assets (ROA)—and offers insight
into whether a company's use of financial leverage is creating or eroding shareholder value. The
FLI is calculated using a simple formula: FLI = ROE / ROA. ROE measures the profitability
relative to shareholder equity, while ROA measures profitability relative to total assets. By
examining the relationship between these two ratios, the FLI captures how efficiently a company
is using borrowed capital to enhance equity returns.

A Financial Leverage Index greater than 1 indicates that the company is using debt in a way that
amplifies shareholder returns. In such cases, the firm is earning more on its borrowed funds than
it is paying in interest, meaning leverage is contributing positively to the bottom line.

44
 Difference of 2020-2024
6

0
2020 2021 2022 2023 2024

ROE ROA FLI

On the other hand, an FLI less than 1 suggests that the use of debt is detracting from shareholder
value. This can occur when the costs associated with borrowing—such as interest expenses—are
greater than the returns generated by the borrowed capital. For instance, if a company has a ROE
of 8% and an ROA of 10%, the FLI would be 0.8, indicating that the firm is actually performing
better without leverage. In such cases, high levels of debt may be burdening the company, reducing
profitability, and potentially signaling financial distress. This is especially concerning for investors
and creditors, as it implies the company is not effectively managing its capital structure.

The FLI is particularly valuable in industries where the use of leverage is common or even
necessary—such as banking, real estate, utilities, and telecommunications—as it allows analysts
and investors to assess whether companies are using debt to their advantage. However, while a
high FLI may point to improved returns, it also comes with greater financial risk. Excessive
reliance on debt can expose a company to vulnerabilities such as rising interest rates, declining
revenues, or economic downturns, all of which can impair the company’s ability to meet its
obligations and sustain profitability.

45
Advantages of Using the Financial Leverage Index

• Easy to calculate

• Strong insight into financial performance

• Useful for management and investors

• Helps highlight efficient use of capital

Limitations and Criticisms of FLI

• Doesn’t reflect cost of debt

• Based on accounting earnings

• Sensitive to one-time gains or losses

• Doesn’t reflect off-balance sheet financing

• May mislead in high-debt or asset-light companies

 To understand how sensitive FLI is to various financial changes, consider a scenario

where the company’s net income drops to $400,000 while keeping assets and equity
constant. ROA drops to 4%, ROE to 10%, and FLI remains at 2.5. This consistency
shows that FLI is not affected by income alone but by the relative efficiency of equity vs.
asset utilization.
 To model various outcomes, analysts often create sensitivity tables showing how FLI
changes under different asset, equity, and income conditions. These tools help
management plan for downturns or evaluate whether taking on additional debt would be
beneficial or risky.

46
A company's capital structure—how it balances debt and equity—is central to its financial strategy.
The FLI directly reflects the outcomes of capital structure decisions. According to the Modigliani-
Miller theorem, under certain conditions (like no taxes or bankruptcy costs), a company’s value is
unaffected by its capital structure. However, in the real world, where such assumptions do not
hold, the FLI becomes a practical way to assess whether the chosen mix of debt and equity is
value-accretive.

If a company can borrow at a lower cost than its ROA, the leverage will enhance ROE and push
the FLI above 1. But if borrowing costs exceed the return generated from assets, ROE suffers, and
so does the FLI. This relationship underscores why managing the cost of capital and monitoring
interest coverage is critical.

FLI also plays a role in navigating between two major financial theories: the trade-off theory,
which suggests there’s an optimal debt level where the benefits of tax shields are maximized
without overwhelming risk, and the pecking order theory, which prioritizes internal financing first,
debt second, and equity last. By monitoring FLI, companies can test whether their current approach
to capital aligns with their strategic goals and market conditions.

The Financial Leverage Index (FLI) can vary significantly across industries, primarily due to
differences in capital intensity, access to financing, and operational risk. In banking and financial
services, for example, leverage is a fundamental part of the business model. Banks borrow funds
at relatively low interest rates (e.g., through customer deposits) and lend at higher rates. As a result,
these institutions typically have high leverage ratios. For banks, a high FLI is not inherently
dangerous—it reflects how well the institution is managing its spread and operational efficiency.
However, during times of economic stress or credit crunches, an excessively high FLI may expose
vulnerabilities.

In manufacturing, companies often use debt to finance large-scale operations, purchase equipment,
and fund inventory. A manufacturer with well-managed operations can benefit significantly from
financial leverage, especially if fixed costs are spread over large volumes. Here, FLI helps assess
whether debt is enhancing or hurting profitability. Similarly, real estate and construction
companies often operate with substantial leverage due to the upfront capital requirements of land

47
acquisition and development. For these firms, FLI provides a snapshot of whether their property
investments are generating sufficient returns.

On the other end of the spectrum, technology and professional services firms often maintain lower
debt levels and have fewer tangible assets. In such industries, FLI values tend to be closer to 1,
and leverage might play a less prominent role in performance. A significant increase in FLI for a
tech firm could indicate strategic borrowing, possibly to fund acquisitions or R&D, which should
be evaluated cautiously. In summary, FLI is a versatile metric, but its interpretation must be
industry-specific to provide accurate insights.

In the context of broader financial analysis, the FLI acts as a valuable tool that complements other
key ratios. Analysts often incorporate FLI into the DuPont analysis, which breaks down ROE into
multiple drivers, including ROA and leverage. This multi-step approach reveals how efficiently a
firm uses its assets and how financial leverage influences the final return on equity. By dissecting
ROE into its components—operating efficiency (net profit margin), asset use efficiency (asset
turnover), and leverage (equity multiplier)—DuPont analysis aligns naturally with the insights
offered by FLI.

Furthermore, the FLI can be integrated into valuation models, such as Discounted Cash Flow
(DCF) and Economic Value Added (EVA). In DCF, understanding whether a company is using
its capital structure efficiently impacts assumptions about the weighted average cost of capital
(WACC) and long-term cash flow generation. A strong FLI may signal a firm’s ability to sustain
higher ROE, justifying premium valuations. In the EVA model, which measures a firm’s ability to
generate returns above its cost of capital, FLI supports the interpretation of whether leverage is
enhancing or destroying value.

For equity investors and credit analysts, FLI serves as a quick check to determine whether a
company’s debt policies are paying off. Combined with other leverage-related ratios—like the
debt-to-equity ratio, interest coverage ratio, and debt service coverage ratio—FLI helps build a
holistic picture of financial stability, performance, and risk.

48
 FINANCIAL GROWTH

1
FLI
0
ROA
2020
2021 ROE
2022
2023
2024

ROE ROA FLI

8. Advantages of Using the Financial Leverage Index

One of the primary advantages of FLI is its simplicity. It uses two commonly available metrics—
ROE and ROA—making it easy to calculate and interpret. This accessibility makes FLI a popular
tool not only among seasoned analysts but also among entrepreneurs, small business owners, and
students of finance. Moreover, FLI directly links operational performance to financing decisions,
helping stakeholders understand the effectiveness of a company’s capital strategy.

Finally, FLI can be applied to both public and private firms. Since ROA and ROE can be calculated
from basic financial statements, FLI is not dependent on market-based inputs like stock prices,
which can be volatile or unavailable in certain contexts.

49
CHAPTER 5

CONCLUSION

50
5.1 SUMMARY OF FINDINGS

o The descriptive statistics reveal the nature of the variable in the way of a percentage that
ROE and ROA performance are 32 and 13.
o The standard deviation of the ROE and ROA from the result is 7.2% and 23%
o Correlation analysis whether the variables are related to each other. From that ROA and
DER have a positive relationship
o SR and PR have a positive relationship
o DER and ROE have a negative relationship from the correlation analysis
o Regression finds out the DER and PR have a negative impact on ROE
o Regression reveals that DER and PR have a positive impact on ROA
o According to the figure below, it was at22.6 in 2018but increased to 71.52 in the year of
2023. It indicates that the debt-to-equity ratio is rising.
o According to the figure below, it was at 0.0458 in 2018 but slightly increased to 0.1803 in
the year of 2023. It indicates that the solvency ratio is rising.
o According to the figure below, it was at 0.44 in 2018 but dramatically decrease to 0.13 in
the year of 2023. It indicates that the proprietary ratio is more inflation
o According to the figure below, it was at 0.212 in 2018 but very slow improvement to 0.123
in the year of 2023. It indicates that the return on assets is more stable
o According to the figure below, it was at 47.2 in 2018 but very slow improvement in the
year from 2022 to 2023., 6.373 and 8.813 respectively. It indicates that the return on equity
is in growing stage.

51
5.2 DIRECTION FOR FURTHER STUDY

Further research on financial leverage should delve into industry-specific impacts, analyzing how
leverage varies and affects performance across sectors like manufacturing and tech. Comparing
small vs. large enterprises reveals differing leverage strategies and risks. Economic conditions,
especially interest rate fluctuations and market volatility, significantly influence leverage costs and
risks. Investigating the link between leverage and profitability metrics like ROE and ROA clarifies
optimal leverage levels. Exploring the risk of financial distress due to high leverage and its impact
on stock valuations is crucial. Global perspectives, including cross-country comparisons and
emerging market analyses, offer insights into diverse financial landscapes. Studying how leverage
affects economic cycles and financial stability is essential. Key metrics like debt-to-equity and
interest coverage ratios should be central to these investigations. Ultimately, research should aim
to provide practical guidance on managing leverage for sustainable growth and risk mitigation.

52
5.3 LIMITATION OF THE STUDY

• Due to time constraints, only a limited range of data has been gathered.
• Restrictions imposed while collecting the financial data from the company.
• Due to the narrow scope of data collection, the analytical process is bound.

53
5.4 SUGGESTION

o Focus on improving asset utilization to further enhance ROA, as higher returns can support more
leverage
o Maintain an optimal balance between debt and equity to maximize ROA while managing financial
risk.
o Regularly assess debt levels to ensure that they remain sustainable and continue to enhance, rather
than hinder, profitability.
o Keep a close watch on key financial metrics to ensure that increases in leverage do not lead to
excessive risk.
o Communicate the strategy behind leveraging debt to stakeholders, emphasizing how it supports
growth and profitability
o Evaluate the current debt levels and consider reducing leverage to improve ROE, as lower debt can
enhance profitability.
o Explore opportunities for raising capital through equity rather than debt to improve the DER and
potentially enhance ROE.
o Work on improving profit margins through better pricing strategies or cost control, which can help
improve PR and ROE.
o Conduct a thorough risk assessment to understand how current leverage levels impact overall
financial health and stakeholder perceptions
o Regularly assess debt service requirements to ensure they do not burden profitability and impact
ROE negatively.

54
5.5 CONCLUSION

This article examines data from SREE ACCOUNTRICKS. utilizing a balance sheet as a sample of five
years of data (2018–2023). I assess the financial leverage that is possessed and how it affects the overall
functioning of the company. By applying regression modeling, correlation analysis, and descriptive
analysis. Here regression model shows DER has a negative impact on ROE and PR has a negative impact
on [Link], H1 is rejected H2 and DER have a positive impact on ROA and PR has a positive impact on
[Link], H3 is accepted H4 is rejected. The outcome validates hypotheses H2 and H3. Further research or
results indicate that the value of financial leverage does not exit the value of equity in this way it shows the
financial leverage ROA has a positive impact on the firm performance

55
APPENDIX.

56
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