We commonly look forward to two sources for raising capital, By employing self-money or Capital and borrowing or debt. A variety of analyses are done on a regular basis to arrive at a sound capital structure decision. One basis of analysis can be the influence on Earning Per Share, the second is the impact on ROE, the third analysis is analyzing the operating financial and total leverage. The fourth can be on ratios used by the firm to ponder upon the financial statements and various other valid statements. the drop and they carry with themselves is the incomplete and partial answer to the capital structure decisions but still, they are in use by most of the organizations.
If we consider PBIT EPS analysis, where we see how EPS change due to change in PBIT under various financial heads. This arises out of the operating leverage in the form of fixed operating costs such as salary, rent, taxes, etc. While doing the calculation either we compare the expected value of PBIT with the Indifference value or compare the down siding PBIT below its Indifference value. The next technique is ROI-ROE analysis. Here we look at the relationship between the return on investment and return on equity for different levels of financial leverage. financial leverage awards from fixed financing costs like debt and interest There is a positive relationship between ROI and ROE. When ROI increases ROE increases and vice versa. that is the combined leverage where the fixed operating cost and interest expenses are held together. a small amount of change in revenue can lead to a higher percentage change in profit before tax.
The next given technique is ratio analysis which is highly used by every organization to assess whether they have a satisfactory capital structure. Ratios like interest coverage, cash flow coverage, Debt coverage, and fixed asset coverage are used highly used for the same.