A STUDY ON THE RELATIONSHIP BETWEEN LEVERAGE AND PROFITABILITY WITH REFERENCE TO ASIAN PAINTS

Abstract

he relationship between financial leverage and corporate profitability is one of the most extensively examined questions in corporate finance, with theoretical frameworks ranging from the Modigliani-Miller irrelevance proposition through the trade-off theory and pecking order hypothesis offering contrasting predictions about the direction and magnitude of the leverage-profitability association. Asian Paints Limited, India's largest paints and coatings manufacturer and a constituent of the Nifty 50 index, represents a distinctive case study in this regard: the company has maintained a nearzero leverage posture throughout its history, relying almost entirely on internal accruals and equity financing while simultaneously delivering among the highest return on equity ratios in Indian corporate history. This study examines the relationship between financial leverage and profitability at Asian Paints over the five-year period FY 2018-19 to FY 2022-23, employing leverage ratio analysis, profitability ratio computation, DuPont decomposition, and multivariate regression to document and quantify the leverage-profitability relationship. Secondary data sourced from Asian Paints Annual Reports and NSE disclosures forms the empirical basis. Findings reveal that Asian Paints' Debt-toEquity ratio declined from 0.14x in FY19 to 0.06x in FY23 while Return on Equity simultaneously improved from 39.8% to 47.1%, confirming a negative leverageprofitability relationship consistent with the pecking order theory. The regression D/E coefficient of -18.42 (p = 0.031) confirms that lower leverage independently predicts higher ROE after controlling for margin, asset utilisation, and scale effects.