The Impact of Leverage on Earnings Per Share: A Study of Selected Petroleum Companies in India

The main purpose of this article is to study the impact of leverage on earning per share of selected petroleum companies in India. The article also aims to examine the correlation between three types of leverage with earning per share and to know more about the leverage and petroleum industry in India. The most appropriate Parametric and Non parametric tests are employed and the analysis of data is presented through different graphs and tables. This article comes across to draw a comparison between the degree of combined leverage and earnings per share of selected petroleum companies during the study period.


Introduction
The Oil and Gas industry for any underdeveloped, developing and developed country is very critical and important. The various important functions of this industry are exploration, extraction, refining, transporting and obviously marketing of various petroleum products (Bridge, 2008). Fuel oil and gasoline (petrol) are the most important products of this industry for the production of various pharmaceutical products, fertilizers and chemical products etc. Petroleum is also used as a raw material (Akhondi et al., 2010).
The industry is usually divided into three major components: Upstream, Midstream, Downstream. Midstream operation is usually included in the downstream category. Upstream includes that have engaged on exploration and extraction of crude oil and gas (Bridge & Wood, 2010;Wright, 2017). On the other hand, downstream includes the mainly engaged in refining and marketing of petroleum products. Petroleum is vital to many industries, and is of importance to the maintenance of industrial civilization in its current configuration, and thus is a critical concern for many nations. Oil account for a large percentage of the world's energy consumption, regionally from 32% for Europe and Asia, 40% for North America, 41% for Africa, 44% for South and 53% for the middle-east. The production, distribution, refining and retaining of petroleum taken as a whole represents the world's largest industry in terms of dollar value. In 1997-98, the New Exploration Licensing Policy (NELP) was envisaged to fill the ever-increasing gap between India's gas demand and supply (Nerlekar & Patel, 2016;Nath, 2018). India's economic growth is closely related to energy demand as predicted by Murthy (1997) from 1990 to 2020. Therefore, the need for oil and gas is projected to grow more, thereby making the sector quite conductive for investment (Pandey & Narayani, 2018). India Simple random sampling was used to select the sample from the top five companies which are functioning in the stock market based on the current situation. The study is mainly based on secondary data obtained from the annual reports of these selected petroleum companies and other information has been collected from websites, books, journals, magazines, newspaper etc. The collected data is duly edited, classified, tabulated according to the needs of the objectives and hypothesis. Mathematical and statistical tools and techniques like Ratio, Trends, Simple & multiple correlations have been used. The most appropriate Parametric & Nonparametric tests have been used by the researcher. The data has been presented through different graphs and tables. Data has been converted into relative measure such as ratios, percentages, indices rather than the absolute data. Hypotheses have been tested by the researchers at 5% level of significance, by employing t -test, ANOVA technique, chi-square (X2) test, Karl Pearson's simple correlation, multiple correlations, multiple regressions etc. according to the need of the study (Porter, 2006).

Results and Discussion
For the analysis of data, financial leverage and earnings per share were used. Researchers have calculated 1-Degree of financial leverage -2 Earnings per share and analyzed through ANOVA test. The analysis is divided in to two parts; (1) Analysis of leverage and Earning per share, (2) Analysis of impact of leverage on Earning per share

Degree of Operating Leverage
Operating leverage refers to the use of fixed operating costs such as depreciation, insurance of assets, repairs and maintenance, property taxes etc. in the operations of a firm. But it does not include interest on debt capital. The operating cost of a firm is classified into three types: Fixed cost, variable cost and semi-variable or semi-fixed cost. Fixed cost is a contractual cost and is a function of time. So it does not change with the change in sales and is paid regardless of the sales volume. high on the basis of operating leverage. Operating leverage is relationship between contribution and earnings before interest and tax.

Hypothesis Testing
Ho:-There is no significant difference between Degree of Operating Leverage of selected Petroleum companies in India during the study period. H1:-There is a significant difference between Degree of Operating Leverage of select Petroleum companies in India during the study period.

Degree of financial leverage
Financial leverage is primarily concerned with the financial activities which involve rising of funds from the sources for which a firm has to bear fixed charges such as interest expenses, loan fees etc. These sources include long-term debt (i.e., debentures, bonds etc.) and preference share capital. These two facts lead to the magnification of the rate of return on equity share  When EBIT increase at that time financial leverage is also increase and other companies data is shows in the above table chart.

Hypothesis Testing
Ho: There is no significant difference between degree of financial Leverage of selected Petroleum companies in India during the study period.
H1: There is a significant difference between degree of financial Leverage of Selected petroleum companies in india during the study period.

Degree of Combined Leverage
Operating leverage shows the operating risk and is measured by the percentage change in EBIT due to percentage change in sales. The financial leverage shows the financial risk and is measured by the percentage change in EPS due to percentage change in EBIT.
Both operating and financial leverages are closely concerned with ascertaining the firm's ability to cover fixed costs or fixed rate of interest obligation, if we combine them, the result is total leverage and the risk associated with combined leverage is known as total risk. It measures the effect of a percentage change in sales on percentage change in EPS. The percentage change in EPS to a given percentage change in sales is defined as Degree of Combined Leverage (DCL). DCL expresses combined leverage in quantitative terms. The higher the proportion of fixed operating cost and financial charges, higher is the degree of combined leverage. Like other two leverages the value of combined leverage must be greater than 1DCL can be computed in the following manner.
Formula:    (table value) of ANOVA is 2.866081 at the 5% level of significance. The Fcalculated value is more than the table value, so that Null hypothesis is rejected and alternative hypothesis is accepted. Therefore it concluded that there is a significant difference between degrees of combined leverage among the selected petroleum companies in India during the study period.

Earnings Per Share
Earnings per share (EPS), also called net income per share, is a market prospect ratio that measure the amount of net income earned per share of stock outstanding. In other words, this is the amount of money each share of stock would receive if all of the profits were distributed to the outstanding shares at the end of the year.
Earnings per share are also a calculation that shows how profitable a company is on a shareholder basis. So a larger company's profits per share can be compared to smaller company's profits per share. Obviously, this calculation is heavily influenced on how many shares are outstanding. Thus, a larger company will have to split its earning amongst many more shares of stock compared to a smaller company.

Conclusion
Performance of the all companies is different to each other because performance of Indian oil Corporation Ltd is high and other companies' performance is low. On the basis of ANOVAs test, correlation based and regression based performance are measured. It is concluded that the trend of Indian oil corporation Ltd is very flexible in case of degree of operating leverage. The trend of GAIL is high in 2015-16 but after then continuous decreasing during the study period. The degree of operating leverage indicates the relationship between contribution and EBIT in all the companies' variable cost is very flexible so contribution is also flexible. This also affects the degree of operating leverage of selected petroleum companies. The trend of degree of financial leverage is very sensitive in Reliance industries Ltd because. The performance increases at high degree of performance. In case of financial leverage performance, all the companies are similar because no wider change in interest through interest expenses is at a fixed level. Combined leverage is the combination of both operating and financial leverage. Combined leverage is very high in 2014-15 of the company ONGC, and the earnings per share are in between 12.58 to 102.78 in all the companies. There is a relationship between leverage and earnings per share. In all the companies' null hypothesis is accepted so we can say that there is no significant impact of leverage on earning per share.