Business Risk and its Return A Study on Selected Indian Real Estate Companies

Abstract

The paper explores the connection between business risk and returns in Indian real estate industry, wherein the top 5 firms have been chosen based on their market position and market standing. In order to measure financial performance, the study uses the following key measures: Return on Capital Employed (ROCE) to measure the profitability of the owners, Operating Profit to Capital Employed (OPCE) to measure the operating efficiency, Degree of Operating Leverage (DOL) to measure business risk and Degree of Financial Leverage (DFL) to measure financial risk. Based on secondary data over a period of twelve years between 2011-12 and 2022-23, the analysis uses correlation and t-test to assess the statistical significance of the relationships among the variables. The results indicate that DOL positively relates highly to OPCE, and DFL to ROCE, meaning that the greater the risk in business, the greater the operating returns, and the greater the financial risk, the greater the profitability of owners is. In addition, there exists a high positive correlation between DOL. and DFL, which highlights the interdependence of business risks and financial risks in the business. All in all, the research paper has shown that despite the high amounts of risk that real estate companies are exposed to, these risks are generally countered by their corresponding returns in a balanced manner, thus confirming the principle of risk-return trade off in the industry.