THE IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY : EVIDENCE FROM INDIAN FMCG FIRMS

Abstract

This research investigates the connection between capital structure and profitability in the Indian Fast-Moving Consumer Goods (FMCG) sector, utilizing panel data spanning from 2015 to 2024. The core objective is to assess the effect of the debt-to- equity ratio (DER) on firm profitability, which is measured through indicators such as Return on Assets (ROA), Return on Equity (ROE), and Net Profit Margin (NPM). The study employs various multivariate analytical tools, including correlation analysis, MANOVA, and MANCOVA, to evaluate how capital structure influences profitability while accounting for variables like firm size, sales growth, and asset turnover. The results highlight that the link between capital structure and profitability is neither linear nor uniform. While some companies—such as Nestlé and Hindustan Unilever Limited (HUL)—effectively utilize higher levels of debt to enhance profitability, others, including Patanjali and Varun Beverages, face fluctuations in profitability due to elevated leverage. On the other hand, firms like ITC demonstrate that a more conservative, equity-oriented capital structure can also yield strong financial performance. These insights indicate that capital structure alone is not a definitive predictor of profitability; factors like operational efficiency, scale, and competitive positioning play more decisive roles. The study supports aspects of financial theory, notably the Trade-off Theory and Pecking Order Theory. It shows that companies with consistent cash flows can leverage debt to their advantage, whereas firms with unstable financials may find high debt burdens detrimental. The paper concludes that decisions related to capital structure must be approached strategically, taking into account both macroeconomic trends and firm-specific characteristics. The study offers valuable recommendations for Indian FMCG firms, emphasizing the importance of aligning capital structure with operational and strategic efficiency to achieve optimal profitability.