This study, titled "Assessing the Impact of Capital Structure on Profitability: A Case Study of Indian Railway Finance Corporation (IRFC)," aims to investigate the influence of various capital structure elements on the profitability of IRFC over 10 years. A quantitative research approach was utilized, relying on secondary data sourced from Money Control, which covered key financial indicators such as Return on Assets (ROA), Asset-to-Equity Ratio, Debt-to-Equity Ratio, and Interest Coverage Ratio. The findings suggest that IRFC’s profitability, as measured by ROA, has improved over the study period, reflecting enhanced asset utilization and operational efficiency. The analysis also indicates an increasing reliance on debt, as evidenced by a rising Asset-to-Equity Ratio, which introduces higher financial risk. Additionally, the study reveals a positive correlation between the Debt-to-Equity Ratio and profitability, implying that leveraging debt has contributed positively to profitability. The Interest Coverage Ratio, while showing a positive relationship with profitability, was found to have a statistically insignificant impact. In conclusion, the research highlights the significant role of capital structure in shaping IRFC’s profitability, underscoring the importance of strategically managing the balance between debt and equity to optimize financial performance.
Table of Contents
Research Abstract
1. INTRODUCTION
2. REVIEW OF LITERATURE
3. RESEARCH METHODOLOGY
4. DATA ANALYSIS AND INTERPRETATION
5. FINDINGS AND CONCLUSION
REFERENCES
Abstract
This study, titled "Assessing the Impact of Capital Structure on Profitability: A Case Study of Indian Railway Finance Corporation (IRFC)," aims to investigate the influence of various capital structure elements on the profitability of IRFC over 10 years. A quantitative research approach was utilized, relying on secondary data sourced from Money Control, which covered key financial indicators such as Return on Assets (ROA), Asset-to-Equity Ratio, Debt-to-Equity Ratio, and Interest Coverage Ratio. The findings suggest that IRFC’s profitability, as measured by ROA, has improved over the study period, reflecting enhanced asset utilization and operational efficiency. The analysis also indicates an increasing reliance on debt, as evidenced by a rising Asset-to-Equity Ratio, which introduces higher financial risk. Additionally, the study reveals a positive correlation between the Debt-to-Equity Ratio and profitability, implying that leveraging debt has contributed positively to profitability. The Interest Coverage Ratio, while showing a positive relationship with profitability, was found to have a statistically insignificant impact. In conclusion, the research highlights the significant role of capital structure in shaping IRFC’s profitability, underscoring the importance of strategically managing the balance between debt and equity to optimize financial performance.
1. INTRODUCTION
The Indian Railway Financial Corporation (IRFC) is a prominent financial entity that plays a critical role in the Indian railway sector . Established in 1986, IRFC operates under the ownership of the Government of India and functions as a public sector undertaking (PSU) within the Ministry of Railways . Its primary objective is to raise funds for the development and modernization of Indian Railways, which is one of the world’s largest and most complex railway systems, serving millions of passengers and freight across the country. One of the key functions of IRFC is to raise financial resources to support Indian Railways’ capital expenditures.
Capital structure refers to the specific combination of debt and equity that a company uses to finance its overall operations and growth. For the Railway Finance Corporation (RFC), the capital structure holds unique significance due to its role as a specialized financial institution dedicated to supporting railway infrastructure and development. IRFC raises funds through a mix of debt instruments, equity contributions, and hybrid financial products to fulfill its mandate of financing critical railway projects and infrastructure expansion in India.
IRFC also takes on the responsibility of managing the capital efficiently to ensure that it is allocated towards projects that promise the highest return in terms of social and economic benefits. The funds raised by IRFC are also utilized for a wide array of projects that align with the strategic goals of Indian Railways, such as modernizing facilities, enhancing safety measures, improving passenger amenities, and increasing the overall operational efficiency of the rail network. This ensures that Indian Railways remains an essential part of India’s economic and social fabric, serving as a reliable mode of transportation for both passengers and freight. Beyond its direct role in financing rolling stock and operational needs, IRFC also supports several large-scale infrastructure projects that are central to the long-term growth of Indian Railways. Understanding and managing its capital structure is crucial for maintaining financial stability and fulfilling its long-term objectives.
The capital structure of the Railway Finance Corporation is primarily composed of debt financing, equity financing, and hybrid instruments. Debt financing forms a significant portion of RFC’s capital structure. These debt instruments are typically secured at competitive interest rates due to government backing, which reduces risk perception among investors.
A well-structured capital framework is indispensable for RFC to achieve its strategic and operational goals. Cost of capital optimization is a primary consideration, as minimizing financing costs enables RFC to offer affordable funding solutions for railway infrastructure development. By strategically balancing debt and equity, IRFC ensures financial sustainability, enabling it to meet project deadlines and maintain liquidity. Furthermore, the capital structure plays a pivotal role in risk management .
The railway projects, the key characteristic is the long-term horizon for returns on investment. Railway infrastructure typically has an extended lifecycle, with assets often being operational for several decades. However, the returns generated from these projects are also realized over a long period, as revenue streams such as passenger fares, freight charges, and leasing agreements accumulate gradually. Which require substantial investment over long time frames. Railway infrastructure, such as tracks, stations, locomotives, and signaling systems, demands high initial capital outlays and continuous funding for expansion, modernization, and maintenance.
Given the extensive costs involved, a well-structured capital mix—comprising both debt and equity—becomes essential in ensuring the project’s financial viability and operational efficiency. Debt financing is often the primary source of funding for railway infrastructure due to its lower cost relative to equity and the ability to secure long-term loans at favorable interest rates. Governments and state-backed institutions, like the Indian Railway Finance Corporation (IRFC), typically issue bonds and take loans to finance these massive projects.
This structure is tailored to meet the extensive funding requirements of the Indian Railways, one of the largest railway networks in the world, which demands consistent capital for rolling stock acquisition, track expansions, electrification, and modernization projects. IRFC’s ability to raise capital through long-term bonds, loans, and external borrowings at competitive rates, owing to its government-backed creditworthiness, provides a critical foundation for its operations. Assessing the capital structure is critical to the profitability and long-term sustainability of railway infrastructure.
1.1 Need of the Study
The study needs to understand the impact of capital structure on profitability is particularly significant for institutions like IRFC, given its vital role in financing critical infrastructure projects for Indian Railways. With its unique mandate and reliance on market borrowings, IRFC's financial strategy and capital structure directly influence its profitability and operational efficiency. Assessing this relationship is essential for policymakers, stakeholders, and financial managers to make informed decisions regarding funding strategies, cost management, and resource allocation. Additionally, the findings of this study can provide valuable benchmarks for other public sector enterprises and NBFCs, highlighting the importance of optimizing capital structure to enhance profitability and long-term sustainability.
1.2 Objectives of the Study
1. To analyze the capital structure of the Indian Railway Finance Corporation (IRFC).
2. To examine the relationship between capital structure and profitability of the Indian Railway Finance Corporation (IRFC).
3. To evaluate the impact of capital structure on the profitability of the Indian Railway Finance Corporation (IRFC).
1.3 Hypothesis of the Study
H02: There is no significant relationship between the capital structure and profitability of the Indian Railway Finance Corporation (IRFC).
H03: The capital structure has no significant impact on the profitability of the Indian Railway Finance Corporation (IRFC).
1.4 Scope of The Study
The present study focuses on assessing the impact of capital structure on the profitability of the Indian Railway Finance Corporation (IRFC). The scope of the study is limited to the financial performance of IRFC over the ten years from 2014-15 to 2023-24. This timeframe allows for a comprehensive evaluation of changes in capital structure and profitability during varying economic conditions and policy environments. This study is expected to benefit policymakers, financial analysts, and stakeholders by providing a detailed understanding of how capital structure decisions impact profitability, particularly in public-sector financial institutions like IFRC.
1.5 LIMITATION OF THE STUDY
1. The study focuses solely on IRFC, a public sector enterprise, which may limit the applicability of findings to other companies, particularly private firms or entities in different sectors.
2. The study uses Return on Assets (ROA) as the primary indicator of profitability, which may not fully reflect other dimensions of financial performance, such as Return on Equity (ROE) or Net Profit Margin.
3. External factors such as macroeconomic conditions, regulatory changes, or global financial trends, which might influence capital structure and profitability, are not explicitly addressed in this study. Their indirect impact may lead to unaccounted variances in the analysis.
2. REVIEW OF LITERATURE
1. Anna M. Rakoczy et al. (2024) study introduces an innovative approach for assessing the conditions of short railway bridges using vehicle onboard systems. Recognizing the critical role railway bridges play in transportation networks and the importance of maintaining their safety, the research addresses the limitations of visual inspections, which often fail to detect hidden structural damage that can lead to catastrophic failures. Building on these findings, the research expanded to evaluate bridges in service, specifically examining several short, open-deck railway bridges on the Polish Railway using track geometry cars. The analyzed data revealed observable changes in bridge responses, validating the effectiveness of the onboard systems for bridge condition monitoring. The study concludes with a summary of findings and outlines future steps for implementing this technology in routine bridge assessments, emphasizing its potential to enhance the safety and reliability of railway infrastructure.
2. Milan Dedik et al. (2024): The article emphasizes the importance of railway transport as a fundamental element of passenger and freight services, aligning with the EU's transport policy goal of ensuring efficient infrastructure use and high-quality service delivery. The findings of this article are Railway infrastructure quality and train traffic stability are influenced by various critical factors. Current methodologies for determining infrastructure capacity are assessed, and innovative procedures for evaluating its potential and scope are proposed. The article concludes the valuable insights into improving the determination of railway infrastructure capacity and planning traffic operations.
3. Sun Yizhi et al. (2024) focus on the development of a postal and telegraph system, which was integral to the railway's operation and essential for the local population. The research highlights the social and administrative complexities of establishing an effective communication network in the region . The study finds that constructing a comprehensive postal and telegraph system was a slow and challenging process. Despite local authorities' repeated appeals and self-government bodies' interest in improving communication for the population, postal and telegraph offices were primarily set up in response to immediate military or railway construction needs . In conclusion, the authors emphasize that the modernization of the postal and telegraph system was not only delayed by financial constraints but also shaped by the prioritization of military and railway construction requirements over civilian needs.
4. Xueyan Wang (2024): The study examines the impact of transportation infrastructure development on regional economic integration, using provincial panel data from 2010 to 2021 and a spatial panel analysis method. The findings reveal a significant spatial autocorrelation between inter-provincial transportation infrastructure and market integration. Among the factors studied, railway density plays the most substantial role in fostering the national unified market. The findings highligh t the critical role of railway infrastructure in promoting economic integration and a unified national market. The study recommends enhancing the quality and efficiency of railway transportation, increasing the scale of foreign direct investment, and accelerating efforts to construct a unified national market. These measures are essential for leveraging transportation infrastructure's full potential in regional development and market integration.
5. Jonathan King et al. (2023): The article examines the challenges of managing Reliability, Availability, and Maintainability (RAM) in Mega Railway Projects (MRPs), which are costly and often exceed budgets and schedules. It highlights the absence of robust guidelines for implementing RAM processes, despite existing standards like BS EN 50126-1 outlining related tasks . The study identifies the critical need for integrating RAM processes into MRPs from the outset to improve project reliability and minimize overruns. While BS EN 50126-1 specifies RAM-related tasks, it lacks actionable guidance on their execution, complicating the efforts of RAM engineers in securing resources. It concludes the importance of a systematic RAM process in ensuring the success of MRPs. It calls for the development of comprehensive RAM guidelines to address gaps in existing standards, enabling RAM engineers to manage systems more effectively throughout a project’s lifecycle.
6. Mohammed Wasim Khan et al. (2023): The challenges faced by Indian Railways, the fourth largest rail network globally, focusing on financial sustainability, infrastructure, and organizational structure. It explores the shift of traffic to roads and air transport, resulting in declining rail traffic and revenue. The findings are declining financial health of Indian Railways has led to reduced investments in infrastructure, inadequate maintenance, and substandard services, with poor infrastructure contributing to train accidents. A compliance audit by the Comptroller and Auditor General of India for 2016-17 highlighted these issues. By 2021-22, total revenue expenditure increased to ₹2,10,899 crore (a 10% rise over 2019-20), and proposed capital expenditure grew to ₹2,15,058 crore (a 21% rise over 2019-20). this concludes that the Indian Railways faces critical challenges due to declining revenues, insufficient infrastructure investments, and safety issues. Despite recent increases in expenditure, systemic reforms and strategic investments are essential to modernize operations, improve service quality, and ensure sustainable growth.
7. Mohammed Wasim Khan et al. (2023): This examines the decline in rail traffic and its financial implications for Indian Railways, which operates the fourth-largest rail network globally. In findings of recent decades, a significant shift of traffic to road and air transport has led to declining rail revenue, reduced infrastructure investments, and poor service quality. The resulting deterioration in infrastructure has also contributed to increased train accidents, highlighting critical challenges in operational safety and efficiency. It concludes that the financial challenges faced by Indian Railways demand urgent reforms, including diversification of revenue streams, enhancement of service quality, and modernization of infrastructure to restore its competitiveness and ensure passenger safety.
8. Rahul Vardhan Bhatnagar et al. (2023): This study highlights the practical implications of influence zone mapping for enhancing transportation planning and infrastructure development in Indian Railways. It focuses on the Northern Railway Division, where the influence zones of 40 stations were analyzed using travel length frequency distribution. The results show that higher-hierarchy stations have larger and more dispersed influence zones, reflecting their importance in connecting larger regions, while lower-hierarchy stations have smaller, localized zones that support regional access. These insights emphasize the need to account for station hierarchy when planning infrastructure investments . The study concludes that influence zone mapping is an effective method for creating a more efficient and responsive transportation system, enabling targeted improvements in last-mile connectivity.
9. Sabirov N et al. (2023) focus on broadening the classification criteria for diagnostic systems based on their impact on movement safety and potential cost savings in maintenance and repair. The study identifies several key issues that hinder optimal development, such as the isolated development of diagnostic tools across different holdings, the need for diagnostics during train operations (including heavy-haul and long trains), and the reliance on manual and visual inspection methods, which are often unreliable. In conclusion, the authors emphasize the importance of a structured and comprehensive approach to diagnostics, which can enhance safety, reduce costs, and optimize the development and deployment of diagnostic tools within the railway sector.
10. João Morais, et al. (2022) study explores a novel methodology for assessing railway track support conditions using modal analysis. The research is motivated by the growing global interest in enhancing railway transport efficiency for both goods and passengers and the need for effective infrastructure management at operational and economic levels. The study focuses on developing a vibration-based structural damage identification method to observe characteristic frequencies of the The multi-element system was formed by railway infrastructure. These frequencies are analyzed to detect changes in the physical properties of the railway infrastructure, including its substructure conditions. In conclusion, the study presents a promising solution for efficient and detailed monitoring of railway infrastructure, contributing to the broader goal of improving railway transport reliability and safety.
11. Praveen Gujjar j (2022) study evaluates the profitability and financial patterns of ten selected Indian infrastructure companies, emphasizing the critical role of infrastructure in national economic development. The analysis includes key financial ratios to assess performance. The findings of the study are infrastructure sector, encompassing roads, railways, power, telecom, education, water supply, and sanitation, is foundational for economic growth. Financial ratio analysis—covering Operating Profit Margin, Gross Profit Margin, Net Profit Margin, Return on Assets, etc. This study concludes that the infrastructure sector plays a vital role in supporting other economic sectors, but its financial management must account for the unique characteristics of each subsector.
12. Som Sekhar Bhattacharyya et al. (2022) research aims to analyze India’s poor performance in the Logistics Performance Index (LPI) and explore how the deployment of emerging technologies could improve the country's logistics infrastructure. The study is designed to evaluate the factors influencing India's LPI and suggest technological interventions for improvement. Based on a Delphi technique survey with five experts, the study identified key areas where emerging technologies could enhance India's logistics sector. The Analytical Hierarchy Process (AHP) was used to prioritize the application of technologies across various sub-dimensions of infrastructure, including roadways, railways, ports, airports, warehouses, and institutional frameworks. The study concludes that integrating emerging technologies into India's logistics infrastructure is essential to enhancing its performance on the LPI.
13. Victor Chakraborty et al. (2022) research focus paper delves into the Vision 2020 plans for Indian Railways, which focus on various modernization initiatives aimed at improving efficiency, sustainability, and safety within the railway system. The study identifies key factors such as track enhancement, electrification, environmental sustainability, and network expansion as focal points of the Vision 2020 strategy. Additionally, high-speed train introduction, capacity creation, and advancements in train safety and technological excellence are highlighted as areas needing attention. These initiatives are crucial for improving the performance and competitiveness of Indian Railways. The findings underscore the importance of Vision 2020 in shaping the future of Indian Railways. By addressing these strategic areas, Indian Railways can modernize its infrastructure, reduce carbon footprints, and continue to contribute significantly to India's economic growth.
14. G P Girish et al. (2021) study discusses challenges faced by private parties in constructing and maintaining freight terminals under existing railway policies and introduces the recently launched Gati Shakti Multi-Modal Terminal policy aimed at easing these challenges. The findings under the traditional policy, private parties were responsible for all expenses related to constructing and maintaining freight terminals, even on railway-owned land. This financial and technical burden made private freight terminal operations cumbersome for construction costs. The article concludes that the Gati Shakti Multi-Modal Terminal policy marks a significant shift in Indian Railways' approach to freight infrastructure by reducing barriers for private parties.
15. Deepanjali Babu Mazumder's (2017) study examines the capital structure of infrastructure companies in India, focusing on those listed on the Indian Stock Exchange. With the rapid expansion of infrastructure projects such as roads, ports, airports, and smart city developments, understanding financial strategies has become crucial. The research employs Ratio Analysis to explore the composition of debt and equity financing used by these companies. Findings reveal significant variability in capital structures across firms, influenced by factors such as industry characteristics, financial goals, and market conditions. The study concludes that optimizing capital structure is vital for sustainable growth, especially in a competitive sector where financial decisions directly impact operational efficiency.
16. K.S. Rajini's (2017) study focuses on India’s urban centers are facing immense pressure due to increasing migration and lack of adequate infrastructure. Urbanization and infrastructure development are crucial for sustaining economic momentum. These findings give a brief on India’s current cities are overcrowded, and infrastructure is inadequate to support the growing population. Strategic investments in roads, railways, ports, and domestic aviation can not only alleviate urban congestion but also create millions of jobs. This concludes that the construction industry, already a significant employer, could play a pivotal role in this transformation. India must urgently invest in large-scale infrastructure projects to support urbanization and create employment. Failure to address these challenges will result in stagnation and stunted economic growth.
17. S. Mukherjee's (2017) study focuses on the paper revisits historical lessons from colonial railway finance to draw parallels for modern infrastructural challenges in Indian Railways . The findings of the study are Past successes in utilizing international capital flows and technology transfers for railway expansion highlight alternative modes of infrastructure financing. Current reliance on limited state funding has resulted in inefficiencies and growing regional disparities. Private capital, while promising, is insufficient to address the scale of investment needed. It concludes that a balanced approach combining public investment and financial reforms is crucial for reviving Indian Railways. Learning from historical strategies, India can adopt innovative financing models to bridge infrastructural gaps and foster long-term economic growth.
18. Jai Prakash (2017) The article addresses the high-risk nature of level crossings in Indian Railways, emphasizing their contribution to train accidents, fatalities, and operational inefficiencies. It discusses the Kakodar Committee’s 2012 recommendation to eliminate all level crossings within five years as a critical safety measure . The Findings of this study are in 2014-15, out of 54 train accidents at level crossings, 48 occurred at unmanned crossings due to road user negligence, with road users often being the primary casualties . The conclusion is that the Level crossings represent critical safety and operational hazards for Indian Railways. Their elimination, as recommended by the Kakodar Committee, is essential to improving safety, reducing accidents, and enhancing train operation efficiency.
19. Prithvi Simha's (2016) study focuses on the challenges faced by Indian Railways in freight transport, highlighting the inherent limitations of state-financed infrastructure development in emerging economies. The study models the projected modal split in freight transport through two scenarios based on historical data. The "business as usual" scenario shows a continued preference for road transport. The research argues for privatizing Indian rail freight through vertical integration and the creation of sub-networks, drawing on lessons from inter-modal shifts in Latin American countries with similar demographics. The study concludes that privatization and a shift in policy towards a more integrated and efficient rail-freight system are crucial to achieving a sustainable and balanced transportation future for India.
20. S. Chandrachud et. al. (2015) study explores the relationship between transportation infrastructure and development in East Africa and the Indian Ocean (EAIO) region, hypothesizing a positive link between the two. Development is defined by gross national income per capita (GNI/cap), while transportation is assessed based on major transport infrastructure types. Using multiple regression analysis with natural logarithms, the findings reveal a statistically significant positive relationship at the 95% confidence level, affirming the hypothesis. The study concludes that transportation infrastructure plays a pivotal role in regional development, underscoring its importance as a key investment priority.
21. Ambe J. N Joh et. al. (2012) study Focuses on the relationship between transportation infrastructure and development in the East Africa and Indian Ocean (EAIO) region. Development is defined using gross national income per capita (GNI/cap), and transportation is measured through various major forms of transport infrastructure. The findings are multiple regression analysis with natural logarithms, the study reveals a statistically significant positive relationship between transportation and development at the 95% confidence level, supporting the hypothesis of their positive linkage. It concludes that transportation infrastructure plays a critical role in driving development in the EAIO region, emphasizing its importance in regional growth strategies and policymaking.
22. Vassilios Profillidis's (2001) study examines the transformative impact of globalization and the liberalization of the transport market in the 1990s on the railway industry. The study focuses on the separation of railway infrastructure and operations, a pivotal step that laid the groundwork for introducing competition and achieving economic rationalization within the sector. The findings of the study are the pricing principles of railway infrastructure and evaluate the financial and operational impacts of this separation. The study concludes that these reforms significantly enhanced modernization, improved their financial stability, and influenced transport demand positively.
23. David A. Moss's (1997) article provides an overview of Rail track, established to own and manage nearly all British railway infrastructure following the privatization of British Rail. It highlights Rail Track’s responsibilities, investment strategies, and operational approach as a private entity. The article's findings are Infrastructure maintenance and renewal are outsourced to specialized companies, while it collaborates with the Rail Regulator and Franchising Director. The company employs an extensive monitoring system to enhance reliability and punctuality and implements various investment programs targeting critical rail components such as tracks, signals, bridges, and electrification systems. This concludes Rail Track exemplifies a privatized approach to railway infrastructure management, combining financial performance with a commitment to safety, service quality, and long-term investments.
Research Gap
The relationship between capital structure and profitability has been widely studied across various industries; however, limited research focuses on financial institutions, particularly government-backed entities like the Indian Railway Finance Corporation (IRFC). While existing literature emphasizes the capital structure strategies of private sector companies, there is a notable gap in understanding how capital structure decisions impact profitability in public sector organizations that operate in a regulated environment with unique funding mechanisms. Moreover, most studies on capital structure and profitability tend to generalize findings without delving into sector-specific nuances. For IRFC, a non-banking financial company (NBFC) specializing in financing rail infrastructure, these dynamics are critical. This study aims to bridge this gap by providing insights into IRFC’s capital structure and its direct influence on profitability, addressing the lack of focused research on this institution within the broader public finance sector.
3. RESEARCH METHODOLOGY
1. Research Design
The study adopts a quantitative research approach to assess the impact of capital structure on the profitability of the Indian Railway Finance Corporation (IRFC). This approach facilitates the use of numerical data and statistical techniques to examine the relationship between selected financial variables.
2. Sample Period
The study covers 10 years, from 2014-15 to 2023-24, to provide a comprehensive analysis of trends and patterns in capital structure and profitability under varying economic conditions.
3. Data Source
The study relies on secondary data sourced from Moneycontrol, which provides reliable financial data on IRFC. Annual financial data will be used to ensure consistency and accuracy in the analysis of the study.
Variable
The research examines the relationship between independent variables (capital structure ratios) and a dependent variable (profitability indicator).
Independent Variables
Debt-to-Equity Ratio
Formula: Total Debt / Shareholders’ Equity
Purpose: Measures the proportion of debt financing relative to equity. Interpretation: A higher ratio suggests significant reliance on debt financing.
Equity Ratio
Formula: Shareholders’ Equity / Total Assets
Purpose: Indicates the proportion of assets financed by shareholder equity.
Interpretation: A lower equity ratio suggests higher leverage, common for financial institutions.
Interest Coverage Ratio
Formula: EBIT / Interest Expense
Purpose: Measures the company's ability to cover its interest obligations with its earnings. Interpretation: A higher ratio indicates a stronger ability to meet interest payments.
Asset-to-Equity Ratio
Formula: Total Assets / Shareholders’ Equity
Purpose: Highlights how much of the company's assets are financed by equity versus liabilities. Interpretation: A higher ratio indicates significant financial leverage.
Dependent variable
Return on Assets (ROA)
Formula: Net Income / Total Assets
Purpose: Measures the company's profitability of its total assets. Interpretation: Higher ROA indicates better utilization of assets to generate profits.
STATISTICAL TOOLS
To effectively analyze the impact of capital structure on the profitability of the Indian Railway Finance Corporation (IRFC), the study employs several statistical tools, each serving a specific purpose to achieve the research objectives.
The first tool utilized is descriptive statistics, which provides a summary of the data by calculating measures such as the mean, median, standard deviation, and range. This tool helps to identify key characteristics and variability in the financial data, including capital structure ratios (Debt-to-Equity Ratio, Equity Ratio, etc.) and profitability measures like Return on Assets (ROA). Descriptive statistics offer a foundational understanding of IRFC's financial performance during the study period, helping to detect patterns and outliers in the data.
Next, trend analysis is employed to evaluate year-on-year changes and movements in financial variables over the sample period (2014-15 to 2023-24). By examining trends in capital structure ratios and profitability indicators, this tool helps to identify long-term patterns, such as improvements or declines in financial performance. Visual representations such as graphs and trend lines are used to make these observations clearer.
To explore the relationship between variables, bivariate correlation is applied. This tool measures the strength and direction of the relationship between individual capital structure ratios (independent variables) and profitability (dependent variable - ROA). Using the Pearson Correlation Coefficient, the study identifies whether a positive, negative, or no correlation exists between variables such as the Debt-to-Equity Ratio and ROA. This analysis provides critical insights into how strongly changes in capital structure are associated with profitability.
Finally, multi-ordinary least squares (OLS) regression is employed to assess the impact of multiple independent variables (capital structure ratios) on the dependent variable (profitability). The regression model considers variables like Debt-to-Equity Ratio, Equity Ratio, Interest Coverage Ratio, and Asset-to-Equity Ratio to determine their collective and individual effects on ROA. By analyzing regression coefficients, R-squared values, and p-values, this tool evaluates the significance and predictive strength of each capital structure variable. The regression equation enables the study to quantify how changes in these ratios directly influence profitability, offering actionable insights for decision-makers.
4. DATA ANALYSIS AND INTERPRETATION
Objective 1:
To evaluate the impact of capital structure on the profitability of the Indian Railway Finance Corporation (IRFC).
TREND ANALYSIS
Table- 1 Trend Analysis of Debt to Equity Ratio
Illustrations are not included in the reading sample
Illustrations are not included in the reading sample
Source: Secondary Data
Over the years, IRFC has experienced fluctuating trends in both its Return on Assets (ROA) and Debt to debt-to-equity ratio. The ROA showed an upward trend from 2018, peaking at 1.35% in 2022, reflecting improved asset efficiency. However, the Debt to Equity Ratio has been on the rise since 2015, reaching 3.21 in 2023, signaling increasing financial leverage and potential security risks. While ROA improvements indicate better profitability, the rising debt burden suggests higher financial and market risks. The increasing debt also exposes the company to potential interest rates and operational risks. Despite the growth in asset returns, IRFC needs to carefully manage its debt to maintain financial stability and mitigate long-term risk.
Table- 2 Trend Analysis of Equity Ratio
Illustrations are not included in the reading sample
Source: Secondary Data
Illustrations are not included in the reading sample
The Return on Assets (ROA) for IRFC has shown consistent growth, peaking in 2020 at 1.33%, indicating strong asset utilization, with a slight dip in 2021 before recovering in 2022 and 2024. The Equity Ratio has fluctuated, decreasing over the years to 2.66 in 2023, reflecting higher debt reliance and potential market and interest rate risks. Despite this, the slight recovery in 2024 to 3.15 suggests efforts to stabilize finances. The increase in ROA suggests effective management of security and operational risks, while the drop in equity ratio indicates potential concerns with reputation and market risks. Overall, IRFC appears to be managing risks effectively but faces challenges related to leverage and market conditions.
Table- 3 Trend Analysis of Interest Coverage Ratio
Illustrations are not included in the reading sample
Illustrations are not included in the reading sample
Source: Secondary Data
RFC's Return on Assets (ROA) has shown consistent growth from 0.83% in 2014 to 1.35% in 2022, indicating effective asset utilization and reduced security risk. The Interest Coverage Ratio improved significantly, rising from near zero in 2014 to 2.69 in 2024, reflecting a stronger ability to manage debt and reduced interest rate risk. The sharp increase in the interest coverage ratio from 2020 suggests improved financial stability and reduced market and reputation risks. The overall trend indicates that IRFC has enhanced its operational efficiency, debt servicing capabilities, and resilience to external risks. The growth in both metrics signals a positive outlook for the company’s financial health.
Table- 4 Trend Analysis of Asset to Equity
Illustrations are not included in the reading sample
Sources: Secondary Data
Illustrations are not included in the reading sample
IRFC's Return on Assets (ROA) has shown steady growth, increasing from 0.83% in 2014 to 1.35% in 2022, indicating improved asset efficiency and reduced security risk. The Asset-to-Equity Ratio decreased over time, reaching 19.87 in 2021, suggesting a reduction in debt reliance, which helped manage market and interest rate risks. However, the ratio increased to 25.04 in 2024, signaling a potential rise in debt and exposure to higher market and interest rate risks. The consistent growth in ROA reflects effective operational risk management, while fluctuations in the Asset-to-Equity Ratio highlight changes in financial leverage. The shift toward higher leverage in recent years could raise concerns regarding financial stability and reputation risk. Overall, IRFC's performance indicates a balance between profitability and financial risk management.
Objective 2:
To examine the relationship between capital structure and profitability of the Indian Railway Finance Corporation (IRFC).
BIVARIATE CORRELATION
Table- 1 Bivariate correlation of Asset to Equity Ratio
Illustrations are not included in the reading sample
Source: Secondary Data
The correlation of -0.7337 between the Return on Assets (ROA) and Asset to Equity Ratio for IRFC indicates a strong negative relationship. This suggests that as IRFC increases its debt (higher Asset-to-equity ratio), its profitability (ROA) decreases. Higher leverage increases financial costs, reducing asset returns. To improve profitability, IRFC should consider reducing its debt load and increasing equity financing. Additionally, focusing on operational efficiency could help enhance returns. IRFC should reassess its capital structure to balance leverage and profitability. A more balanced capital structure may reduce financial risk and improve returns.
Table- 2 Bivariate Correlation of Interest Coverage Ratio
Illustrations are not included in the reading sample
Source: Secondary Data
The correlation of 0.4975 between Return on Assets (ROA) and Interest Coverage Ratio suggests a moderate positive relationship. As IRFC’s ability to cover interest payments improves (higher Interest Coverage Ratio), its profitability (ROA) also tends to increase. This implies that better management of interest expenses contributes to higher asset returns. Maintaining a healthy interest coverage ratio reduces financial risk and allows more focus on profitability. IRFC could improve its capital structure by balancing debt and equity to sustain a good interest coverage ratio. This would enhance its ability to generate returns from assets. Therefore, managing interest expenses efficiently can help boost IRFC's overall profitability.
Table- 3 Bivariate Correlation of Equity Ratio
Illustrations are not included in the reading sample
Source: Secondary Data
The correlation of -0.6615 between Return on Assets (ROA) and Equity Ratio indicates a strong negative relationship. As the Equity Ratio increases (more reliance on equity financing), ROA tends to decrease, suggesting that higher equity financing may reduce profitability. This could imply that IRFC might not be using its equity as efficiently to generate returns from its assets. A higher equity ratio could result in lower leverage, which might hinder profit generation. IRFC should consider optimizing its capital structure to balance debt and Equity effectively. Adjusting the equity ratio could help improve profitability. A more balanced capital structure could enhance ROA by maximizing the returns from its assets.
Table- 4 Bivariate correlation of Debt to Equity Ratio
Illustrations are not included in the reading sample
Source: Secondary Data
The correlation of 0.7766 between the Return on Assets (ROA) and Debt to debt-to-equity ratio indicates a strong positive relationship. This suggests that as IRFC increases its debt relative to equity, its profitability (ROA) tends to improve. Higher leverage may help IRFC generate higher returns on its assets by using debt to finance investments. However, while higher debt can boost profitability, it also increases financial risk. IRFC should carefully balance debt to avoid over-leveraging. The results imply that increasing the Debt to Equity Ratio might enhance returns, but risk management is crucial. Therefore, IRFC could optimize its capital structure to improve profitability while managing risk effectively.
Objective 3:
To evaluate the impact of capital structure on the profitability of the Indian Railway Finance Corporation (IRFC).
MULTI ORDINARY LEAST SQUARES(OLS) REGRESSION
Table- 1
Illustrations are not included in the reading sample
Sources: Secondary Data
The table presents the results of a regression analysis assessing the impact of capital structure on the profitability of the Indian Railway Finance Corporation (IRFC) from 2014 to 2024. The regression results show that the Asset to Equity Ratio hurts the profitability of IRFC. The coefficient for the Asset to Equity Ratio is -0.025844, indicating that an increase in the ratio leads to a decrease in return on assets (ROA). The t-statistic of - 3.239889 and the p-value of 0.0102 are statistically significant at the 5% level, suggesting that the relationship between capital structure and profitability is significant. Thus, a higher asset-to-equity ratio negatively affects IRFC's profitability.
Table- 2 Multi Ordinary Least Squares of Interest Coverage Ratio
Illustrations are not included in the reading sample
Source: Secondary Data
The regression results show a positive but statistically insignificant relationship between the Interest Coverage Ratio and the profitability of the Indian Railway Finance Corporation (IRFC) for the period 2014 to 2024. The coefficient for the Interest Coverage Ratio is 0.154838, indicating that an increase in interest coverage is associated with a slight increase in return on assets (ROA). However, the p-value of 0.1194 is above the 0.05 significance level, suggesting that this relationship is not statistically significant. Therefore, interest coverage does not have a significant impact on IFC's profitability in this period.
Table- 3 Multi Ordinary Least Squares of Equity Ratio
Illustrations are not included in the reading sample
Sources: Secondary Data
The regression results show a negative relationship between the Equity Ratio and the profitability of the Indian Railway Finance Corporation (IRFC) for the period 2014 to 2024. The coefficient for the Equity Ratio is -0.222916, indicating that an increase in the equity ratio is associated with a decrease in return on assets (ROA). The t-statistic of -2.645898 and the p-value of 0.0267 are significant at the 5% level, confirming that the relationship is statistically significant. Therefore, higher equity levels in the capital structure negatively impact IRFC's profitability.
Objective 4:
To analyze the capital structure of the Indian Railway Finance Corporation (IRFC)
Descriptive Statistics
Table- 1 Descriptive Statistics of Capital Structure of IRFC
Illustrations are not included in the reading sample
Source: Secondary Data
The table presents the descriptive statistics for several financial ratios and performance metrics for the Indian Railway Finance Corporation (IRFC), including Asset Equity Ratio, Debt Equity Ratio, Equity Ratio, Interest Coverage Ratio, and Return on Assets (ROA). The
The mean Asset to Equity Ratio is 28.06, with a standard deviation of 7.24, indicating some variation in the company's reliance on debt compared to equity. The Debt to Equity Ratio has a mean of 2.00 and a standard deviation of 0.77, suggesting moderate leverage. The Equity Ratio has a mean of 3.92, with relatively less variation, reflected in its lower standard deviation of 0.72. The Interest Coverage Ratio averages 0.17, showing that IRFC has a low ability to cover interest expenses, with a skewness of 0.41. Return on Assets (ROA) has a mean of 1.06, indicating a moderate level of profitability, and its distribution shows slight negative skewness. The Jarque-Bera test for normality indicates that all variables, except the Interest Coverage Ratio, approximate a normal distribution with p-values higher than 0.05. The data provides insights into IRFC's capital structure, profitability, and ability to manage debt and interest payments, suggesting that while the company is relatively highly leveraged, it faces challenges in covering its interest expenses efficiently.
Objective 5:
To analyze the capital structure of the Indian Railway Finance Corporation (IRFC).
UNIT ROOT TEST
Table- 1 Unit root test of Asset-to-equity ratio
Illustrations are not included in the reading sample
Source: Secondary data
The Augmented Dickey-Fuller (ADF) test was applied to the Assets to assets-to-equity ratio for the period 2014 to 2024 to assess its stationarity. The null hypothesis of the test suggests that the series has a unit root, meaning it is non-stationary. The calculated test statistic was -3.473801, with a p-value of 0.0459. Since the p-value is less than the 5% significance level, we reject the null hypothesis, indicating that the Assets to assets-to-equity ratio is stationary over the examined period. This result suggests that the ratio does not contain a unit root and is likely stable or mean-reverting.
Table- 2 Unit root test of Debt to Equity Ratio
Illustrations are not included in the reading sample
Source: Secondary data
The Augmented Dickey-Fuller (ADF) test was performed on the Debt to Equity Ratio for the period 2014 to 2024 to determine whether the series is stationary. The null hypothesis suggests that the series has a unit root, indicating it is non-stationary. The test statistic was - 7.717970, with a p-value of 0.0013. Given that the p-value is significantly lower than the 5% significance level, we reject the null hypothesis. This indicates that the Debt to debt-equity ratio is stationary during the period 2014-2024, meaning it does not exhibit a unit root and is stable over time.
Table- 3 Unit Root Test of Equity Ratio
Illustrations are not included in the reading sample
Source: Secondary data
The Augmented Dickey-Fuller (ADF) test was applied to the Assets-to-equity ratio data for the period 2014 to 2024 to assess the presence of a unit root. The null hypothesis of the test is that the data has a unit root, meaning it is non-stationary. The ADF test statistic is -4.960005, and the p-value is 0.0064. Since the p-value is less than the 0.05 significance level, we reject the null hypothesis. This indicates that the Assets to Equity ratio is stationary and does not exhibit a unit root during the specified period.
Table - 4 Unit root test of Interest Coverage Ratio
Illustrations are not included in the reading sample
Source: Secondary data
The Augmented Dickey-Fuller (ADF) test was conducted on the data for the variable "DDINTEREST_COVERAGE_RATIO" for the period 2014 to 2024 to examine the presence of a unit root. The null hypothesis of the test is that the data has a unit root, meaning it is non-stationary. The test statistic is -3.784770, and the corresponding p-value is 0.0377.
Since the p-value is less than the commonly used significance level of 0.05, we reject the null hypothesis. This suggests that the "DDINTEREST_COVERAGE_RATIO" is stationary and does not exhibit a unit root over the examined period.
Table- 5 Unit root test of Return on Assets
Illustrations are not included in the reading sample
Source: Secondary data
The Augmented Dickey-Fuller (ADF) test was conducted on the data for the variable "DRETURN_ON_ASSETS " for the period 2014 to 2024 to test for the presence of a unit root. The null hypothesis of the test is that the data has a unit root, indicating it is non-stationary.
The ADF test statistic is -7.591595, and the p-value is 0.0004. Since the p-value is well below At the 0.05 significance level, we reject the null hypothesis. This suggests that the "DRETURN_ON_ASSETS " variable is stationary and does not exhibit a unit root during the examined period.
5. FINDINGS AND CONCLUSION
FINDINGS
1. The study found that IRFC’s Return on Assets (ROA) has consistently increased from 0.83% in 2014 to 1.35% in 2022, reflecting efficient asset utilization and better profitability. This indicates effective capital allocation and operational management, which enhance the company’s overall financial performance, despite varying capital structure.
2. The analysis reveals that the Asset-to-Equity Ratio has steadily increased from 41.22 in 2014 to 25.04 in 2024, indicating a growing reliance on debt financing. This shift indicates higher market and interest rate risks, highlighting the need for careful management of debt to avoid financial instability.
3. The study found that the Interest Coverage Ratio improved dramatically from near zero in 2014 to 2.69 in 2024, showing an enhanced ability to service debt. This indicates that while IRFC has increased leverage, it is effectively managing its interest obligations, indicating a healthier capital structure with reduced interest rate risk.
4. The analysis indicates a strong negative correlation of -0.7337 between ROA and Asset to asset-to-equity ratio, revealing that as IRFC increases its debt (higher Asset to Equity Ratio), its profitability (ROA) decreases. To improve capital structure, IRFC should consider reducing debt and focusing on equity financing to enhance returns and reduce financial risk.
5. The study reveals a moderate positive correlation of 0.4975 between ROA and the Interest Coverage Ratio, indicating that an improved ability to cover interest payments boosts profitability. Maintaining a healthy interest coverage ratio will enhance financial stability and profitability, significantly that balancing debt and equity is crucial for IRFC's capital structure.
6. The analysis found a strong negative correlation of -0.6615 between ROA and the Equity Ratio, implying that higher equity financing could reduce profitability. IRFC should optimize its capital structure by balancing debt and equity to avoid underutilizing equity and maximize returns on assets while managing potential risks.
7. The study indicates a negative coefficient of -0.025844 for the Asset to Equity Ratio, indicating that higher leverage (more debt relative to equity) negatively affects IRFC’s profitability. To optimize its capital structure, IRFC should focus on managing its debt levels carefully to prevent a decrease in return on assets (ROA).
8. The analysis reveals a positive relationship between the Debt to Equity Ratio and profitability, with a coefficient of 0.245764, indicating that increasing debt relative to equity has benefited IRFC's profitability. This suggests that IRFC could leverage debt strategically to enhance asset returns, but must balance it with financial risk.
9. The study found that the Interest Coverage Ratio shows a positive but statistically insignificant relationship with ROA (p-value of 0.1194). This suggests that IRFC’s ability to cover interest payments does not significantly influence profitability, implying that other capital structure factors have a stronger impact on profitability.
Conclusion
The study on the impact of capital structure on the profitability of the Indian Railway Finance Corporation (IRFC) provides valuable insights into the company's financial performance from 2014 to 2024. The findings indicate a consistent improvement in Return on Assets (ROA), which suggests effective asset utilization and operational management. However, the analysis also reveals a growing dependence on debt, as evidenced by the increasing Asset-to-Equity Ratio, which presents a challenge to maintaining sustainable profitability. While the Debt-to-Equity Ratio shows a positive relationship with ROA, indicating that higher leverage has contributed to profitability, the strong negative correlation between the Asset-to-Equity Ratio and ROA suggests that excessive reliance on debt can hinder returns. Furthermore, although the Interest Coverage Ratio is important for debt servicing, its statistical insignificance about ROA suggests that other capital structure factors play a more significant role in determining profitability. The study recommends that IRFC optimize its capital structure by balancing debt and equity to enhance profitability while mitigating financial risk. Overall, the effective management of capital structure is vital for ensuring IRFC’s long-term financial stability and profitability.
SUGGESTIONS
1. The study suggests that higher leverage reduces profitability, while equity financing can limit returns. IRFC should optimize its capital mix to maximize returns while minimizing risk.
2. The study suggests that growing reliance on debt increases market and interest rate risks. IRFC should manage debt levels carefully to maintain financial stability.
3. The study suggests that debt positively influences ROA when managed well. IRFC should leverage debt efficiently while maintaining a sustainable debt-to-equity ratio.
4. The study suggests that IRFC has improved its ability to cover interest payments. The company should ensure steady cash flow and control borrowing costs to sustain this improvement.
5. The study suggests that higher debt levels reduce asset returns. IRFC should invest in high-yield projects and optimize capital allocation to improve profitability.
6. The study suggests that interest coverage has a weak impact on ROA, indicating other key influences. IRFC should continuously assess its financial strategies to enhance long-term growth.
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