Business and Financial Risk: A study on FMGC Companies in India

Abstract

The paper is an attempt to analyse the Business Risk and Financial Risk and its effect on profitability of well known FMCG companies (HUL, Nirma, Dabur and Marico) in India. The secondary data for analysis is retrieved from Capitaline database for ten years period from 1995-96 to 2005-06. The study aims to measure Business risk with the help of FTTR and DOL and Financial Risk with the help of DFL and DER and total risk with the help of DOL and DFL. The study also explores effects of profitability i.e. Profit before interest and tax margin (PBITM), Return on capital employed (ROCE) and Return on Net-Worth (RONW) to the firm’s performance. The study measure the relationship between the Business Risk and Financial Risk by using Pearson’s simple correlation technique and to test such coefficients by ‘t’ test. The study of the interrelation between the business risk associated with all the companies and their operating earning capability does not confirm to the generally accepted rule that higher the degree of business risk greater the profitability.

Keywords: Business Risk, Financial Risk, FMCG Companies, Degree of Operating Leverage, Degree of Financial Leverage

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