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The paper investigates the influence of leverage on the financial performance of selected Indian real estate companies, focusing on profitability indicators like Return on Total Assets (ROTA) and Return on Capital Employed (ROCE). To evaluate and compare the leverage positions across companies, a comprehensive ranking system has been applied based on mean values and coefficients of variations of the profitability indicators. Real estate companies constantly performing better based on the annual turnover and listed on NSE and BSE have been considered for the study. The findings underscore the importance of strategic leverage decisions in maximizing shareholder value and optimizing capital structure in the Indian real estate sector. The study highlights the critical balance that firms must maintain between risk and return while managing debt financing. The study concludes that high degree of leverage is associated with higher profitability for the real estate sector. Future research may be conducted considering sectoral comparisons and regulatory impacts to provide a broader understanding of capital structure dynamics in emerging economies.
The paper investigates the influence of leverage on the financial performance of selected Indian real estate companies, focusing on profitability indicators like Return on Total Assets (ROTA) and Return on Capital Employed (ROCE). To evaluate and compare the leverage positions across companies, a comprehensive ranking system has been applied based on mean values and coefficients of variations of the profitability indicators. Real estate companies constantly performing better based on the annual turnover and listed on NSE and BSE have been considered for the study. The findings underscore the importance of strategic leverage decisions in maximizing shareholder value and optimizing capital structure in the Indian real estate sector. The study highlights the critical balance that firms must maintain between risk and return while managing debt financing. The study concludes that high degree of leverage is associated with higher profitability for the real estate sector. Future research may be conducted considering sectoral comparisons and regulatory impacts to provide a broader understanding of capital structure dynamics in emerging economies.
Keywords: Leverage, Profitability, Ratios, Real estate companies, NSE, BSE, Return on capital employed
(ProQuest: ... denotes formulae omitted.)
Introduction
India's real estate sector is one of the fastest-growing industries, significantly contributing to the country's economic development. The sector accounts for approximately 6.5-7% of India's gross domestic product (GDP) and is expected to contribute around 13% by 2025, supported by a projected market expansion from $200 bn in 2021 to $1 tn by 2030 (NAREDCO). It plays a crucial role in developing residential, commercial, hospitality, and retail spaces across metropolitan and urban centers. Furthermore, it is the second-largest employment generator after agriculture, directly and indirectly supporting millions of jobs. Rising disposable incomes, the growing middle-class, and increased investments from nonresident Indians (NRIs) have bolstered demand, especially in cities such as Bengaluru, Ahmedabad, Mumbai, Pune, Goa, Delhi and Dehradun. These urban hubs have emerged as favorable destinations for living and investment based on factors like health, education, infrastructure and employment opportunities.
Despite the optimistic outlook, the sector faces considerable challenges, including regulatory complexities, project delays, liquidity shortages and economic volatility. The enactment of key regulations like the Real Estate Regulation and Development Act (RERA) and the introduction of the goods and services tax (GST) have significantly altered operational frameworks. In such a dynamic environment, the role of financial leverage becomes pivotal. Financial leverage refers to the strategic use of fixed cost funds-typically debt-to enhance returns to equity shareholders. It magnifies both potential returns and financial risk. When returns generated from asset investments exceed the cost of debt, firms can create additional value for shareholders; however, mismanagement of leverage can increase the likelihood of financial distress and default risk.
Traditionally, leverage has been defined in classical finance literature (Van Horne & Wachowicz, 2010) as the use of fixed-cost assets or funds to magnify earnings. Contemporary research, however, highlights a broader perspective, emphasizing not only the returnenhancement potential of leverage but also its associated risks, particularly in sectors characterized by high capital intensity and market sensitivity like real estate. Capital structure decisions, therefore, require careful balancing between debt and equity to achieve optimal profitability without jeopardizing financial stability.
While several empirical studies have extensively explored the relationship between leverage and profitability in industries like manufacturing, banking and oil and gas, relatively little attention has been paid to the Indian real estate sector. This gap is significant because real estate firms differ from other sectors in terms of asset structure, financing needs, regulatory exposure, and sensitivity to economic cycles. This study aims to fill that research void by examining how leverage impacts profitability among selected Indian real estate companies. By doing so, it seeks to offer valuable insights for financial managers, investors, policymakers, and researchers seeking to understand and optimize capital structure decisions in a sector poised for rapid expansion and transformation.
Literature Review
The relationship between leverage and profitability has been extensively studied across various industries and economies, but the findings remain mixed and inconclusive. Some studies find a positive relationship between leverage and profitability, others find a negative association, while a few report no significant linkage. To better organize the discussion, the existing literature is grouped thematically as follows:
Positive Relationship Between Leverage and Profitability
Goyal (2013) found that short-term debt positively impacts profitability for Indian public sector banks, suggesting that prudent use of debt capital can enhance firm performance. Ahmed and Bhuyan (2020) revealed that in Australian service sector firms, reliance on long-term debt was associated with improved profitability. Dong and Su (2010), examining Vietnamese firms, also emphasized that effective working capital management, indirectly linked to leverage management, positively affects profitability. These studies argue that leverage, if managed strategically, can amplify returns without proportionately increasing risks.
Negative Relationship Between Leverage and Profitability
Hussain (2015) examined selected firms listed on the Karachi Stock Exchange and found that higher leverage levels adversely impacted profitability. Singh and Singh (2016) studied Indian cement companies and observed that excessive reliance on debt decreased profitability. Velnampy and Niresh (2012) studied Sri Lankan banking firms and found a negative relationship between capital structure and profitability, reinforcing the argument that high financial leverage increases financial risk and hampers profitability when not managed effectively.
No Significant Relationship
Nugraha et al. (2020) studied Indonesian real estate firms and found that neither leverage nor liquidity had a significant combined effect on profitability. Rani et al. (2016) found no substantial relationship among liquidity, leverage and solvency in Indian nonfinancial companies, suggesting that other factors like firm size, industry-specific dynamics and market conditions may moderate the leverage-profitability relationship.
Sector-Specific and Contextual Studies
Masdupi et al. (2018) analyzed Indonesian manufacturing companies and concluded that liquidity, leverage, and profitability significantly influence the likelihood of financial distress. Kalyani and Mathur (2017) examined the Indian oil and gas sector and found mixed evidence regarding leverage's impact on profitability, highlighting that capital-intensive sectors might experience different leverage behavior compared to service-oriented industries. Ghosh and Maji (2006) emphasized the significance of operating leverage in Indian industries and found that high operating leverage could either magnify profits or amplify losses, depending on revenue volatility.
Ekadjaja et al. (2019) demonstrated that factors like institutional ownership and firm size significantly affect leverage decisions among Indonesian manufacturing firms, suggesting that ownership structures and company size mediate the leverage-profitability relationship. Mahmood et al. (2019) found an inverted U-shaped relationship between leverage and profitability in Chinese listed firms, implying that up to a certain point, leverage improves profitability, but beyond that it deteriorates firm performance.
Budhathoki et al. (2020) analyzed Indonesian listed banks and found that while liquidity positively impacts profitability, leverage must be managed carefully to avoid financial distress. Mily (2014) highlighted the importance of maintaining solvency for firms like Nestle Pvt. Ltd, where careful management of leverage contributed to sustained profitability.
Research Gap
Most prior studies focus predominantly on industries like manufacturing, banking or services sectors. The real estate sector, especially in emerging economies like India, remains underexplored. Given the sector's capital-intensive nature, longer gestation periods, cyclical demand patterns and high dependency on external financing, leverage decisions become even more critical. Unlike manufacturing firms with steady cash flows, real estate companies face liquidity constraints and market fluctuations, amplifying the risks associated with financial leverage. Furthermore, major regulatory changes like RERA and GST have transformed the operational and financial environment for Indian real estate firms, making the study of leverage's impact on profitability even more relevant.
This study seeks to bridge this gap by focusing specifically on selected Indian real estate companies. By doing so, it aims to contribute sector-specific insights into the leverageprofitability dynamic, addressing a critical gap in both academic literature and practical financial management strategies for one of India's most crucial industries.
Objective
The objectives of the study are:
* To study the leverage position of selected real estate companies; and
* To examine the relation between leverage and profitability of the selected real estate companies.
Data and Methodology
The study investigates the relationship between leverage and profitability in Indian listed real estate companies. It focuses on 21 consistently high-performing companies listed on NSE and BSE, selected based on their net sales volume during 2011-12 to 2018-19.
Secondary data from the financial statements of these companies, obtained from their annual reports, form the basis of analysis. The study employs data from 2018-19, making necessary adjustments to annualize financial information where reporting periods vary. This approach explores the impact of long-term capital structure decisions, measured by leverage on profitability within the sector. For analyzing the data, the techniques of financial statement analysis and statistical tools like ratio analysis, arithmetic mean, standard deviation, coefficient of variation, comprehensive test using average and consistency are applied. In addition, statistical techniques like Spearman's rank correlations have been used. In this case, p values and confidence intervals have not been considered for ranking.
Results and Discussion
Analysis of Leverage Position of Real Estate Company
The employment of an asset or source of funds for which the company has to pay fixed cost or fixed return may be termed as leverage. But the earnings are closely associated with variable cost and fixed cost. If the earnings before interest and taxes exceed the fixed return requirement, the leverage is called favorable. On the other hand, if the earnings before interest and taxes are less than the fixed return requirement, then the leverage is called unfavorable.
Degree of Financial Leverage
Financial leverage (FLEV) refers to a company's use of fixed-cost financing sources, such as long-term bonds and debentures, to magnify the effects of changes in earnings before interest and taxes (EBIT) on earnings per share (EPS). It measures the firm's ability to generate higher returns for equity shareholders using fixed financial charges. Favorable FLEV occurs when returns on assets (ROA) exceed the fixed financing cost, while unfavorable leverage arises when returns fall short. Known as "trading on equity," FLEV increases returns without requiring additional shareholder funds. The degree of financial leverage (DFL) is calculated as the percentage change in EPS divided by the percentage change in EBIT, with DFL > 1 indicating leverage. The greater the DFL, the higher the financial leverage for the company.
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Table 1 summarizes the individual ranks for return on total assets (ROTA) and FLEV. Based on this, the Spearman's rank correlation between ROTA and FLEV is 0.43. It implies ROTA and FLEV have a positive but moderate correlation. Therefore, most of the selected real estate companies have better profitability and also higher leverage in their capital structure.
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The primary objective of trading-on-equity is to maximize return to the equity investors. Therefore, ROCE may be impacted by the degree of leverage in the capital structure. Using the individual ranks for ROCE and FLEV for the selected companies, the Spearman's rank correlations have been calculated (Table 2). The results show that ROCE and FLEV have a positive moderate correlation (0.41). It implies that for the real estate companies in India, use of fixed interestbearing debts in financing the assets may help in increasing their ROCE.
Debt-Equity Ratio
Debt-to-equity ratio (DER) measures a company's financial health and its ability to repay obligations by comparing long-term debt to shareholder equity. A high ratio indicates reliance on debt, increasing bankruptcy risk, while a low ratio is preferred by investors for stability. It highlights a company's leverage, showing the balance between debt and equity financing. This ratio, crucial for analyzing financial structure, varies across industries and helps in assessing the risk and financial strategy of a business. DER is computed using the following equation:
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DER represents the mix of debt capital and equity capital in financing the assets of a company. An optimal mix of debt and equity may help in improving profitability from the perspective of the company as a whole. The empirical analysis shows that there is a positive and moderate correlation (0.46) between DER and ROTA. It implies that higher DER for Indian real estate companies helped them to improve their profitability, measured by ROTA (Table 3).
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Both DER and capital employed represent the capital structures decision of a company. Hence, a comparative analysis of DER and ROCE may give better insight into the financial management of a company. Spearman's rank correlation of 0.50 between DER and ROCE for the selected real estate companies implies that higher DER results in higher ROCE (Table 4).
Measurement of Leverage Position of Real Estate Company
The present position of leverage of the real estate companies is calculated with the help of selected measuring tools. Table 5 highlights the rankings of 21 real estate companies based on average values of leverage indicators. The top three companies are Sobha Developers (1st), D B Realty Ltd (2nd) and Mahindra Lifespace Developers (3rd), while Jaiprakash Associates Ltd. ranks last (19th). When categorized by the coefficient of variation, the leading companies are Unitech (1st), DLF Ltd (1st) and Purvankara Projects (1st) followed by Prestige Estate Projects (2nd) and Jaiprakash Associates Ltd. (3rd). Peninsula Land and Mahindra Lifespace Developers share the 15th position. For composite scores, D B Reality Ltd. secured 1st place, followed by Ansal Properties (2nd) and Nitesh Estates Ltd (3rd), with Omaxe Ltd. ranking lowest (14th).
Conclusion
The study highlights the significant role of leverage in determining profitability and financial performance among Indian real estate companies. A positive moderate correlation was observed between FLEV and ROTA (0.43) and ROCE (0.41), indicating that firms with higher profitability often adopt greater leverage. Similarly, a positive correlation between DER and profitability metrics, such as ROTA (0.46) and ROCE (0.50), underscores the effective use of debt capital in enhancing returns. Sobha Developers consistently performed well, ranking highest in leverage based on mean values and composite scores, while Jaiprakash Associates Ltd. ranked lowest, which indicates that the company is able to make higher profit through their financial services. According to the coefficient of variation, Unitech, DLF Ltd. and Purvankara Projects achieved top positions, with Peninsula Land and Mahindra Lifespace Developers tied at 15th. These findings reveal the critical impact of capital structure decisions on financial outcomes in the real estate sector, which indicates that higher value of coefficient of variation leads to more instability in the context of making financial plans.
The study emphasizes the need for Indian real estate companies to optimize their capital structure by effectively balancing leverage and equity to enhance profitability and financial performance. Companies should focus on leveraging debt strategically to boost returns, while managing the risks associated with high debt levels. Additionally, companies with lower rankings should analyze the practices of top-performing companies like Sobha Developers to improve their financial strategies and align with industry best practices for sustained growth.
Implications: The study reveals a positive moderate correlation between FLEV and profitability metrics like ROTA (and ROCE for Indian real estate companies), indicating that higher leverage enhances returns. Higher DER also improves ROTA and ROCE. Sobha Developers ranked highest in leverage, while Omaxe Ltd. was the lowest. Companies like Unitech and DLF Ltd. demonstrated most stability, highlighting strategic leverage effectiveness across the sector.
Limitations and Future Scope: The study focuses exclusively on the real estate sector, one of the 18 sectors listed under NSE and BSE. It is based solely on secondary data from the authentic Moneycontrol website. No primary data were collected from brokers, traders, or customers to assess opinions on liquidity management and other aspects. The analysis emphasizes leverage and profitability as financial performance indicators, excluding others. Only eight years of financial data from the annual reports of real estate companies were used.
Future research can expand beyond the real estate sector to include other industries listed on NSE and BSE for a broader perspective on financial performance. Incorporating primary data from brokers, traders and customers can provide insights into market opinions on liquidity and leverage management. Additionally, exploring other financial performance indicators, such as cash flow analysis or market valuation metrics, could enrich the analysis. Longer timeframes and cross-country comparisons may also enhance the understanding of the impact of leverage on profitability.
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† Paper presented at the 17th International Conference on Business and Finance (ICBF) - 2025, organized by Department of Finance & Accounting, IBS, IFHE (Deemed to be University u/s 3 of the UGC Act, 1956), Shankarpalli, Hyderabad 501203, Telangana, India, on April 4 and 5, 2025.
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