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FINANCIAL RATIO ANALYSIS

Submitted By:

Kinnar Majithia PGDBM 2010-12 Roll No: P1026

Sydenham Institute of Management Studies, Research and Entrepreneurship

Education

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ACKNOWLEDGEMENT

I take the opportunity to thank Prof. Dharmendra Jain for giving me the opportunity to do a study of

financial statements and also analyze them through this project on analysis of financial ratios of Tata

Consultancy Services Ltd.

I would also like to thank everyone else for helping me in carrying out this study.

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INDEX

About Tata Consultancy Services Ltd. ..................................................................................................... 4

Performance Highlights for 2009-10 ....................................................................................................... 5

Financial Statements for 2009-10 ........................................................................................................... 7

Financial Ratio Analysis ......................................................................................................................... 10

Bibliography .......................................................................................................................................... 22

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ABOUT TATA CONSULTANCY SERVICES LTD.

Tata Consultancy Services Limited (TCS) is the world-leading information technology consulting, services,

and business process outsourcing organization that envisioned and pioneered the adoption of the

flexible global business practices that today enable companies to operate more efficiently and produce

more value.

TCS commenced operations in 1968, when the IT services industry didn’t exist as it does today. Now,

with a presence in 34 countries across 6 continents, & a comprehensive range of services across diverse

industries, TCS is one of the world's leading Information Technology companies. Six of the Fortune top

10 companies are among their valued customers.

TCS is part of one of Asia's largest conglomerates - the TATA Group - which, with its interests in Energy,

Telecommunications, Financial Services, Chemicals, Engineering & Materials, provides TCS with a

grounded understanding of specific business challenges facing global companies.

VISION: To be one of the top 10 global companies by 2010

VALUES: Leading change, Integrity, Respect for Individual, Excellence, Learning and sharing

Services and Solutions

TCS is a leading IT services provider, with a wide breadth of services across the entire Information

technology spectrum. TCS helps clients identify opportunities of improvement, build the roadmap to

getting there & leverage technology to make it possible, by providing the following services & solutions:

Consulting. IT Services. BPO. IT Infrastructure Services. Engineering and Industrial Services. Product Based Solutions. Advertisements

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PERFORMANCE HIGHLIGHTS (2009-10)

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FINANCIAL STATEMENTS

PERFORMANCE SUMMARY

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BALANCE SHEET (Consolidated)

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PROFIT AND LOSS ACCOUNT (Consolidated)

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FINANCIAL RATIOS

Use of Financial ratios:

They are relevant in assessing the performance in respect to:

Liquidity Position:

Solvency Position

Operating Efficiency

Profitability

Limitations of Financial Ratios:

Calculated from financial statements which are themselves

subject to many limitations

For analysis, many ratios and factors are to be considered

Calculated ratios require comparison

Various terms are to be explained for inter-firm comparison

Price level to be considered while making comparison

Ratio analysis is based on judgment of the analyst

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LIQUIDITY RATIOS

Current Ratio:

Also known as ‘Working Capital Ratio’, ‘Solvency Ratio’ or ‘2 to 1 ratio’

Ratio indicates the relationship between Current Assets and Current Liabilities.

Current Assets are assets held for an accounting period and Current Liabilities

Current Liabilities are generally to be paid out of Current Assets.

Ideally, the Current Assets should be more than Current Liabilities. If Current Ratio > 1 then

the currents are said to be enough to pay current obligations.

Analysts consider Current ratio = 2:1 to be ideal, though not always.

This ratio determines:

o Company’s ability to meet its current liabilities

o Credit strength of the company

o Adequacy of working capital

Calculation

Current Assets (Balance Sheet) on 31st March 2009 = Rs. 13511.86 crores

Current Liabilities (Balance Sheet) on 31st March 2010 = Rs. 5967.74 crores

Current Ratio on 31st March 2009 = 2.26

Current Assets (Balance Sheet) on 31st March 2010 = Rs. 15788.88 crores

Current Liabilities (Balance Sheet) on 31st March 2010 = Rs. 8393.86 crores

Current Ratio on 31st March 2010 = 1.88

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Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Current Ratio 2.26 1.88

The Current Ratio value, touted as ideal at 2:1, was better in 2008-09 and it fell down below

2 in 2009-10 thus indicating a decrease in the working capital of TCS to pay out its current

obligations as compared to 2008-09.

Quick Ratio / Acid Test Ratio:

Also known as ‘Liquid Ratio’, ‘Acid Test Ratio’ or ‘Near Money Ratio’

Indicates relationship between liquid assets and liquid liabilities

Ideally, quick assets should be >= quick liabilities

Analysts consider a value of 1 for this ratio as satisfactory

The ratio determines:

o Liquidity position

o Short-term financial position

o Ability to meet commitments without delay

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Quick Ratio 2.25 1.87

The quick ratio value being higher than 1 indicates that the quick assets are enough to

pay out the quick liabilities.

It’s value in 2009-10, however, has decreased over its value in 2008-09 indicating a fall

in the capacity of the company to pay out the obligations

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SOLVENCY RATIOS

Debt-Equity Ratio

Ratio indicates proportion of debt fund in relation to owner’s fund

It indicates:

o The capital structure of the company

o Long-term financial and solvency position

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Debt-Equity Ratio 0.04 0.01

The value has reduced from 0.04 in 2008-09 to 0.01 in 2009-10 which is viewed favorable

from long-term creditor’s point of view

This means that there is relatively higher margin of safety for the creditors

Interest-coverage Ratio

It is used to determine how easily a company can pay interest expenses on outstanding

debt.

The lower the ratio, the more the company is burdened by debt expense.

When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest

expenses may be questionable.

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Interest-coverage Ratio 784.41 684.43

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Overall, the ratio for TCS is good but it has gone down in the financial year 2009-10

compared to 2008-09

Thus, it is an indication of a decrease in the capacity of the concern to pay interest expenses

on its outstanding debt. However, the value is still good enough for the firm

ACTIVITY RATIOS / TURNOVER RATIOS

Inventory Turnover Ratio / Stock Turnover Ratio

Establishes a relation between Cost of Sales and average Inventory

Indicates the no. of times stock is replaced during the year

Indicates velocity of movement of goods

It indicates the inventory management of the company

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Stock Turnover ratio 1321.77 3398.94

The stock turnover ratio value increased greatly in 2009-10 over its value in 2008-09

indicating an even more efficient stock management

Thus, the stocks are sold more frequently and hence less money is needed for inventory

maintenance

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Fixed Asset Turnover Ratio

Fixed Asset Turnover Ratio = Net Sales / Total Assets

It is a measure of the company’s ability to generate net sales from fixed-assets investments

A higher value of this ratio shows that the company has been more effective in using the

investment in fixed assets to generate revenue

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Fixed Asset Turnover Ratio 5.15 4.74

There has been a decrease in the value of the ratio in 2009-10 as compared to 2008-09

It means that the efficiency of the firm to generate revenues from investments in fixed

assets has gone down

Debtor’s Turnover Ratio

It is a relationship between sales and amount receivable

It indicates the speed with which receivables are converted into cash

It indicates the number of times average debtors (receivable) are turned over during a year

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Debtors Turnover Ratio 4.62 5.14

The value of this ratio in 2009-10 has gone up from that in 2008-09

This is an indication of a more efficient management of debtors by the firm in 2009-10

Debts are being collected at a faster rate and shorter debt collection period in 2009-10

period

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Debtor’s Collection Period / Debtor’s Velocity Ratio

It is, again, an indication of the efficiency of the firm’s debt control expressed in days

It represents the average number of days for which a firm has to wait before its debtors are

converted into cash

A short collection period implies prompt payment by debtors

It reduces the chances of bad debts

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Debtors’ Collection Period 79 71

The collection period has gone down by 8 days in 2009-2010

Thus, this is an indication of the debtors being relatively more prompt in clearing their debts

with TCS

Debt management, thus, was more efficient in 2009-2010 as compared to that in 2008-

2008-09

PROFITABILITY RATIOS

Net Profit Ratio

It indicates a firm’s capacity to face adverse economic conditions

It also indicates:

o Efficiency and profitability of the company

o Higher value indicates adequate returns to the owner

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Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Net profit before tax ratio 22.11 27.61

Net profit after tax ratio 18.9 23.31

Both ratios have gone up in 2009-10 as compared to 2008-09

Thus, the firm has made higher gains in 2009-10 relative to 2008-09

Gross Profit Ratio

It is ratio of Gross profit to Net Sales

Also called ‘Turnover Ratio’

Gross Profit is the Net Sales less Cost of Goods Sold

It reflects efficiency with which a firm produces its products

As the gross profit is found by deducting cost of goods sold from net sales, higher the gross

profit better it is

It indicates:

o Margin of profit on sales

o Company’s ability to control cost the cost of sales

The gross profit earned should be sufficient to recover all operating expenses and to build

up reserves after paying all fixed interest charges and dividends

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Gross Profit Ratio (%) 25.01 26.89

The value of this ratio has gone up for TCS for the financial year 2009-10 compared to its

value in 2008-09 indicating that it has made higher profits

This is an indication of an increase in the operating efficiency of the concern in the latter

financial year

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Operating Ratio

It indicates:

o The efficiency of management

o Operating efficiency and profitability

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Operating Ratio (%) 26.87 28.93

As compared to 2008-09, the value of the ratio has gone up in 2009-10

Thus, it indicates that the value of the operating costs in relation to the net sales have gone

up and hence a drop in the efficiency of management

Operating Profit Ratio

It is a relationship between Operating Profit and Sales

It indicates the overall profitability of the company

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Operating Profit Ratio (%) 26.87 28.93

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The Operating Profit in relation to Net Sales ratio went up in 2009-10 over its value in 2008-

09 indicating a better overall profitability in the latter financial year

Return on Capital Employed

It is a type of ‘Return on Investment’

It indicates the available profits on total funds invested

It indicates:

o Rate of return on total fund

o Profitability of the company

o Efficient utilization of funds

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Return on capital employed (%) 43.27 42.46

The slight drop in the ratio value for the financial year 2009-10 indicates a marginal

reduction in the returns available to the concern, yet overall the figure holds good for the

firm

Return on Equity / Return on Proprietor’s Fund

It is a type of ROI, known as ‘Return on Equity’

It indicates the available return on shareholder’s funds

It determines the profit generated by the owners

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Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Return on proprietor’s fund (%) 33.7 38.1

There is an increase in the value of the ratio for the financial year 2009-10 over its previous

year’s value

Thus, there is an increase in the returns available to the proprietor over the funds he has

invested in the business

Return on Equity Capital

It indicates the available return to equity shareholders

It indicates:

o Rate of return on equity shareholder’s fund

o Profitability of the company and efficient utilization of the funds

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Return on Equity Capital (%) 39.1 44.6

An appreciable rise in the value of the ratio in the year 2009-10 indicates that the Returns

available to the equity shareholders for the capital invested have increased in this financial

year

Thus, it is an indication of profitability and efficient utilization of funds

Earnings Per Share (EPS)

It is a measure of the profit available per equity share

It is a measure of the profitability of the company from the owner’s point of view

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

EPS 26.81 35.67

An increase In the EPS value in the year 2009-10 over the previous year indicates a higher

earning value for the shareholders

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Dividend Per Share (DPS)

DPS = Dividend / No. of equity shares

It is the value of dividend paid per equity share

Dividends are a form of profit distribution to the shareholder.

Having a growing DPS can be a sign that the company's management believes that the

growth can be sustained.

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

DPS 14 20

The DPS value has gone up by Rs. 6 for the year 2009-10 indicating a higher dividend for the

shareholders as compared to the previous year

Dividend Payout Ratio

It is a relationship between the earnings available to the shareholders and dividend paid to

them

It indicates the percentage of available profit distributed to shareholders

It is the most useful tool of analysis of profitability from the view of the owners

High ratio indicates liberal dividend policy

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

Dividend Payout (%) 30.54 65.45

The dividend payout value jumped by a margin of around 35% in 2009-10 as compared to its

previous year value

Thus, in the latter year, the company adopted a relatively liberal dividend policy

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P/E Ratio

It indicates the relationship between the market price of the share with its available

earnings

It indicates the amount the investors are willing to pay for each Rupee of earnings

Higher ratio indicates higher profitability and thereby, investor’s confidence

It indicates the no. of times the market price is higher or lower compared to EPS

Mar 2008 - Apr 2009 Mar 2009 - Apr 2010

PE Ratio 10.07 21.89

A two-fold increase in the P/E ratio in the year 2009-10 over the previous year indicates

better prospects for the concern and adding to its overall reputation

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BIBLIOGRAPHY

www.tcs.com

www.moneycontrol.com

www.investopedia.com

www.equitymaster.com