Impact of Financial Leverage on Financial Performance of Tyres And Allied Companies Using Dupont Analysis

Abstract

The study explores the impact of financial leverage on the financial performance of Tyre and Allied Companies in India, which is a critical segment of the manufacturing sector. The research pivot on the relationship between financial leverage (measured by the Debt-to-Equity Ratio (D/E) and Interest Coverage Ratio (ICR)), and financial performance, (assessed through Return on Assets (ROA) and Return on Equity (ROE)). The study uses data from eight listed companies over five years (2019-20 to 2023-24), and employs descriptive statistics, correlation analysis, and multiple regression models for data analysis. The findings of the study reveal that Debt-to-Equity Ratio (D/E) has a weak and insignificant impact on both ROA and ROE, suggesting that debt levels do not significantly influence profitability in this sector. However, the Interest Coverage Ratio (ICR) shows a strong positive correlation with both ROA and ROE, connoting that companies with higher earnings comparative to interest expenses perform better financially. Additionally, the DuPont analysis spotlights that profitability (Net Profit Margin - NPM) is the primary driver of ROE, with asset turnover and financial leverage playing subsidiary roles. The study concludes that Tyre and Allied Companies should prioritize enhancing profitability and managing interest expenses rather than increasing financial leverage to enhance financial performance. The findings of the study provide valuable insights for managers and policymakers in the industry, emphasising the importance of operational efficiency and financial stability over debt financing.