A STUDY ON FINANCIAL PERFORMANCE USING RATIO ANALYSIS in IT Company Bangalore (The selected IT companies - Tata consultancy services ltd.

., Infosys technologies ltd., and Wipro technologies ltd.)

INTRODUCTION CONTEXT OF STUDY: Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationship between the items of the Balance Sheet and the Profit and Loss Account. Financial statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements and study of trends of these factors as shown in a series of statement. Financial Statement analysis is largely a study of relationship among the various financial factors en a business as discussed by the single set of statements and a study of the trend of these factors as shown in a series of statements. In other words Analyzing of financial statements is a process of evaluating the relationship between component part of financial statement to obtain a better understanding of a firms position and performance. Financial statements serve important functions: They provide information on how the firm has performed in the past and what is its current financial position. They are a convenient device for the stakeholders (shareholders, creditors, regulators, and others) to set performance norms and impose restrictions on the management of the firm. They provide useful templates for financial forecasting and planning.

Financial statements are often an important source of information for financial decisions.

METHODS OF ANALYSIS AND INTERPRETATION Common Size Financial Statement Analysis Comparative Financial Statement Analysis Trend Percentage Analysis Fund Flow Statements Cash Flow Statements Ratio Analysis

Common Size Financial Statement Analysis: A useful and convenient way of standardizing financial statements is to express each item on the profit and loss account as a percentage of sales and each item on the balance sheet as a percentage of total assets. The resulting financial statements are called common size statements.

Comparative Financial Statement Analysis: A simple method of tracing periodic changes in the financial performance of a company is to prepare comparative statements. Comparative financial statements will contain items at least for two periods.

Trend Analysis: Trend analysis are immensely helpful in making a comparative study of financial analysis statements for several years the method of calculating trend percentage involves the calculation of percentage relationship that each item bears to the same item in the base year, Any year may be taken as the base year.

Ratio Analysis: This is the most important tool available to financial analysis for their work. An accounting ratio shows the relationship in mathematical terms between two interrelated accounting figures.

Fund Flow Analysis: Fund flow analysis has become an important tool in analytical kit of financial analysis credit grating institutions and financial management. This is because the balance sheet or a business reveals it financial status at a particular point of time.

Cash Flow Analysis: Cash flow means the actual flow or movement of cash in and out of the Enterprise. This analysis shows the changes if any in a business transaction bringing about a change in the cash balance or bank balance.

RATIO ANALYSIS: Ratio Analysis is the most widely used method for the analysis of financial statements, no doubt that financial statements contain the items relating to the Profit and Loss and the financial position of the concern, but the items or figures found in the financial statements will not be of much used if they are considered independently, they will be very useful only when one item is compared with another item. Analysis: The process of analysis, invoice computation, comparison and study of operation of financial data and the preparation study of interpretation of financial data and such as Ratio. Meaning of Ratio Analysis: Ratio Analysis is the technique of the calculation of a number of accounting ratio from the data or figures found in the financial statement the comparison of the accounting ratio with those of the previous year or with those of other concerns engaged in similar line of activities or with those of standard or ideal ratio and the interpretation of the comparison.

STANDARDS OF COMPARISON The ratio analysis involves comparison for a useful interpretation of the financial statements. A single ratio in itself does not indicate favorable or unfavorable condition. It should be compared with some standard. Standards of comparison may consist of: Past ratios: ratios calculated from the past financial statements of the same firm. Competitors ratios: ratios of some selected firms, especially the most progressive and successful competitor, at the same point in time. Industry ratios: ratios of the industry to which the firm belongs, and Projected ratios: ratios developed using the projected, financial statements of the same firm.

TYPES OF RATIOS Financial ratio analysis is a study of ratios between various items or groups of items in financial statements. It is a process of analysis, invoice computation, comparison and study of operation of financial data and the preparation study of interpretation of financial data and such as Ratio. Financial ratios have been classified in several ways: 1) Liquidity ratios 2) Leverage ratios 3) Turnover ratios 4) Profitability ratios

LIQUIDITY RATIOS Liquidity refers to the ability of a firm to meet its obligation in the short run, usually one year. Liquidity ratios are generally based on the relationship between current assets (the sources for meeting short term obligations) and current liabilities. The important liquidity ratios are: current ratio and acid test ratio. Current ratio: Current assets include cash, current investments, debtors, inventories (stocks), loans and advances, and pre-paid expenses. Current liabilities represent liabilities that are expected to mature in the next twelve months. These comprise (1) loans, secured or unsecured, that are due in the next twelve months and (2) current liabilities and provisions. The current ratio measures the ability of the firm to meet its current liabilities current assets get converted into cash during the operating cycle of the firm and provide the funds needed to pay current liabilities. Apparently, the higher the current ratio, the greater the short term solvency. Acid test ratio: Also called the quick ratio, the acid test ratio is defined as: The acid test ratio is a fairly stringent measure of liquidity. It is based on those current assets which are highly liquid inventories are excluded from the numerator of this ratio because inventories are deemed to be the least liquid component of current assets. Debtors Days: Creditors Days:

LEVERAGE RATIOS Financial leverage refers to the use of debt finance. While debt capital is a cheaper source of finance, it is also a riskier source of finance. Leverage ratios help in assessing the risk arising from the use of debt capital. The following ratios are: debt ratio, debt-equity ratio and interest coverage ratio. Debt ratio: it indicates the long term debt out of the total capital employed. Debt-Equity ratio: This ratio is only another form proprietary ratio and establishes relation between the outside long term liabilities and owner funds. It shows the proportion of long term external equity & internal Equities. Interest coverage ratio: Also called the times interest earned, and indicates the credit worthiness of a firm. Interest coverage ratio measures the number of times interest expense can be paid out of earnings before interest and taxes (EBIT) or income from operation.

TURNOVER RATIOS Turnover ratios, also referred to as activity ratios or asset management ratios, measure how efficiently the assets are employed by a firm, these ratios are based on the relationship between the level of activity, represented by sales of cost of goods sold, and levels of various assets. The important turnover ratios are: inventory turnover, receivables turnover, fixed assets turnover, and total assets turnover. Inventory turnover: The inventory turnover, or stock turnover, measures how fast the inventory is moving through the firm and generating sales. The inventory turnover reflects the efficiency of inventory management. Account receivable turnover: this ratio shows how many times sundry debtors turn over during the year. Account receivable turnover is a measure that indicates how quickly a company is collecting its account receivable. Fixed assets turnover: Fixed assets Turnover (FAT) measures the capacity of fixed assets in producing sales. It shows the relationship between fixed assets and sales. The ratio is appropriate in industries where significant equipment is required to be business. This ratio measures sales per rupee of investment in fixed assets.

Total assets turnover: Total assets turnover (TAT) measures how efficiently assets are used to produce sales. It is a measure of the magnitude of net sales generated by the assets of the firm. The higher the assets turnover rate, the better the firm is using its assets to generate sales. PROFITABILITY RATIOS Profitability reflects the final result of business operations. Profitability refers to the ability of a firm to earn a satisfactory income or return on investment in the business. Therefore, profitability ratios measure the profit or money making or earning success of a firm. They are of primary impotent to stockholders, investors and creditors because earnings produce cash flows with which to pay dividends and debts. There are two types of profitability ratios: profit margin ratios and rate of return ratios. Profit margin: profit margin ratios show the relationship between profit and sales. Since profit can be measured at different stages, there are several measures of profit margin. The most popular profit margin ratios are: gross profit margin, operating profit margin, and net profit margin. Gross profit margin: Gross profit is defined as the difference between net sales and cost of goods sold. This ratio shows the margin left after meeting manufacturing costs. It measures the efficiency of production as well as pricing. EBITDA margin: this ratio shows the margin left after meeting manufacturing expenses, selling, general, and administration expenses. Is reflects the operating efficiency of the firm. Net profit margin: this ratio shows the earnings left for shareholders (both equity and preference) as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing, and tax management. Rate of return ratios: Rate of return ratios reflects the relationship between profit and investment. The important rate of return measures are: return on assets, return on capital employed, and return on equity. Return on assets (ROA): Return On Assets (ROA) measures the overall ability of the firm to utilize the assets in which it has invested to earn a profit. It indicates the profitability of a firms assets, the amount of net income it earns in relation to the assets available for use during the year. The higher the ROA the more profitable is the assets in producing income. Return on capital employed: It considers the effect of taxation, but not the capital structure. It is internally consistent. Its merit is that it is defined in such a way that it can be compared directly with the post-tax weighted average cost of capital of the firm. Return on equity: The return on equity measures the profitability of equity funds invested in the firm. Because maximizing shareholder wealth is the dominant financial objective, ROE is the

most important measure of performance in an accounting sense. Return on Equity (ROE) measures the firms ability to earn a return on the owners invested capital.

VALUATION RATIOS Valuation ratios indicate how the equity stock of the company is assessed in the capital market. The market value of equity reflects the combined influence of risk and return, valuation ratios are the most comprehensive measures of a firms performance. The important valuation ratios are: price-earnings ratio, DPS, DPR and market value to book value ratio.

Price-earnings ratio: Price/Earnings Ratio (P/E) ratio is a measure of investor confidence in a company or how the stock rates or values a business. It indicates the future prospects of stock. The price-earnings ratio is a summary measure which primarily reflects the following factors: growth prospects, risk characteristics, shareholder orientation, corporate image, and the degree of liquidity. The earnings per share are simply: profit after tax less preference dividend divided by the number of outstanding equity shares. Dividend per share (DPS): Dividend per Share (DPS) measures the amount of dividends paid per ordinary share outstanding. It shows the amount of returns earned by investors in terms of dividend in relation to their investment in each unit of common stock. Higher the DPS better the returns on stockholders investment as well as the share holds wealth. Dividend payout ratio (DPR): Dividend payout ratio (DPR) reveals the dividend payment and retention policy of the firm. It measures the percentage of a firms distributable earnings that paid out to ordinary shareholders as dividends. The balance or retained earnings is reserved as part of shareholders fund to meet future financial needs. Market value to book value ratio: This compares the market price per share of a company to the book value per share. It is a broad indicator of what the market thinks of a particular stock or how the investors value the stock. A healthy company is usually expected to have a market value of its shares in excess of the book value. A market to book value below 1.0 indicates grave concern about the companys future. Such a firm is said to be selling below book. It must be noted that Book Value per share is total value of equity divided by number of common stock outstanding.

INDUSTRY - INFORMATION TECHNOLOGY On 18 August 1951 the minister of education Maulana Abul Kalam Azad, inaugurated the Indian Institute of Technology at Kharagpur in West Bengal. Possibly modelled after the Massachusetts Institute of Technology these institutions were conceived by a 22 member committee of scholars and entrepreneurs under the chairmanship of N. R. Sarkar. Relaxed immigration laws in the United States of America (1965) attracted a number of skilled Indian professionals aiming for research. By 1960 Information technology (IT) is concerned with the development, management, and use of computer-based information systems. Humans have been storing, retrieving, manipulating and communicating information since the Sumerians in Mesopotamia developed writing in about 3000 BC, but the term "information technology" in its modern sense first appeared in a 1958 article published in the Harvard Business Review; authors Leavitt and Whisler commented that "the new technology does not yet have a single established name. We shall call it information technology (IT). Based on the storage and processing technology employed, it is possible to distinguish four distinct phases of IT development: pre-mechanical (3000 BC 1450 AD), mechanical (14501840), electromechanical (18401940) and electronic. This article focuses on the latter of those periods, which began in about 1940.

INFORMATION TECHNOLOGY INDUSTRY IN INDIA The Information technology industry in India has gained a brand identity as a knowledge economy due to its IT and ITES sector. The ITES industry has two major components: IT Services and business process outsourcing (BPO). The growth in the service sector in India has been led by the ITITES sector, contributing substantially to increase in GDP, employment, and exports. The sector has increased its contribution to India's GDP from 1.2% in FY1998 to 7.5% in FY2012. According to NASSCOM, the ITBPO sector in India aggregated revenues of US$100 billion in FY2012, where export and domestic revenue stood at US$69.1 billion and US$31.7 billion respectively, growing by over 9%. The major cities that account for about nearly 90% of this sectors exports are Bangalore, Chennai, Delhi, Mumbai, Hyderabad, Pune, Kolkata, Coimbatore and Trivandrum. Export dominate the ITITES industry, and constitute about 77% of the total industry revenue. Though the IT sector is export driven, the domestic market is also significant with a robust revenue growth. The industrys share of total Indian exports (merchandise plus services) increased from less than 4% in FY1998 to about 25% in FY2012.

According to Gartner, the "Top Five Indian IT Services Providers" are Tata Consultancy Services, Infosys, Cognizant, Wipro and HCL Technologies. This sector has also led to massive employment generation. The industry continues to be a net employment generator - expected to add 230,000 jobs in FY2012, thus providing direct employment to about 2.8 million, and indirectly employing 8.9 million people. Generally dominant player in the global outsourcing sector. However, the sector continues to face challenges of competitiveness in the globalized world, particularly from countries like China and Philippines. India's growing stature in the Information Age enabled it to form close ties with both the United States of America and the European Union. However, the recent global financial crises have deeply impacted the Indian IT companies as well as global companies. As a result hiring has dropped sharply, and employees are looking at different sectors like the financial service, telecommunications, and manufacturing industries, which have been growing phenomenally over the last few years. India's IT Services industry was born in Mumbai in 1967 with the establishment of Tata Group in partnership with Burroughs.[4] The first software export zone SEEPZ was set up here way back in 1973, the old avatar of the modern day IT park. More than 80 percent of the country's software exports happened out of SEEPZ, Mumbai in 80s.

HISTORY OF INFORMATION TECHNOLOGY The Indian Government acquired the EVS EM computers from the Soviet Union, which were used in large companies and research laboratories. In 1968 Tata Consultancy Services established in SEEPZ, Mumbai by the Tata Groupwere the country's largest software producers during the 1960s. As an outcome of the various policies of Jawaharlal Nehru (office: 15 August 1947 27 May 1964) the economically beleaguered country was able to build a large scientific workforces many as 10,000 Indians were estimated to have settled in the US. By the 1980s a number of engineers from India were seeking employment in other countries. In response, the Indian companies realigned wages to retain their experienced staff. In the Encyclopedia of India, Kamdar(2006) reports on the role of Indian immigrants (1980 - early 1990s) in promoting technology-driven growth. The National Informatics Centre was established in March 1975. The inception of The Computer Maintenance Company (CMC) followed in October 1976. During 1977-1980 the country's Information Technology companies Tata InfoTech, Patni Computer Systems and Wipro had become visible. The 'microchip revolution' of the 1980s had convinced both Indira Gandhi and her successor Rajiv Gandhi that electronics and telecommunications were vital to India's growth and development. MTNL underwent technological improvements. During 1986-1987, the Indian government embarked upon the creation of three wide-area computer networking schemes: INDONET (intended to serve the IBM mainframes in India), NICNET (the network for India's National Informatics Centre), and the academic research oriented Education and Research Network (ERNET).

COMPANIES INTRODUCTION: TATA CONSULTANCY SERVICE LTD. Tata Consultancy Service (TCS) is the worlds leading global Information Technology consulting firm and business outsourcing organization that envisaged and forged the espousal of the flexible global business practices, which nowadays facilitate organizations to man oeuvre more professionally and construct more value.
Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) services, business solutions and outsourcing services, company headquartered in Mumbai, Maharashtra. The IT

industry was not has it is now when TCS started in the year 1968. TCS was started as the Tata Computer Centre a dissection of the Tata group whose chief business was to offer computer services to other concerns. TCS marked a tremendous growth with marking its presence in 44 countries, with an absolute range of services across diverse industrial fields. TCS financially persists to demonstrate the steady stand in the top position of Indian IT firms. As the IT outsourcing market records more rapid growth pace, TCS expressed a steady growth rate in 2011-12, whose consolidated revenue grew by 31% which helped TCS to cross the 48,894 crore revenue milestone. TCS was founded by Tata group which was established by jamstji Tata in 1968 an oldest and respected group of companies in India. The First chairman was Jahangir Ratanji Dadabhoy followed by Nani Palkhivala. The first general manager was F.C. Kohli. Key people: Cyrus Mistry (chairman), N.Chandrasekaran (CEO & MD).

INFOSYS TECHNOLOGIES LTD. Infosys Limited (formerly Infosys Technologies Limited) is an Indian multinational provider of business consulting, technology, engineering, and outsourcing services. It is headquartered in Bangalore, Karnataka. Infosys is the third-largest India-based IT services company by 2012 revenues. Of this revenue, the majority comes from international business. Infosys provides services to help clients in over 30 countries build tomorrows enterprise. Infosys was co-founded in 1981 by N. R. Narayana Murthy, Nandan Nilekani, N. S. Raghavan, S. Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora after they resigned from Patni

Computer Systems. The company was incorporated as "Infosys Consultants Pvt Ltd." in Model Colony, Pune as the registered office and signed up its first client, Data Basics Corporation, in New York. In 1983, Infosys corporate headquarters was relocated to Bangalore. Key people: K.V. Kamath (chairman), S. Gopalakrishnan (co-chairman), S.D.Shibulal (CEO & MD). WIPRO TECHNOLOGY LTD. Wipro Technologies Limited (Wipro), together with its subsidiaries and associates (collectively, the company or the group) is a leading India based provider of IT Services and Products, including Business Process Outsourcing (BPO) Services, globally. Further, Wipro has other business such as India and Asia Pac IT Services and products and Consumer Care and Lighting. Wipro is headquartered in Bangalore, India. Wipro Technologies is a global services provider delivering technology-driven business solutions that meet the strategic objectives clients. Wipro delivers unmatched business value to customers through a combination of process excellence, quality frameworks and service delivery innovation. Wipro was established in 1945 as a vegetable oil manufacturer in Amalner, Maharashtra. The company then was known as Western India Vegetable Products Limited. Its main area of business was the production of Sunflower Vanaspati Oil, and later on, soaps and other consumer care products. During the late 1970s and 1980s, Wipro ventured into the fledgling IT industry in India. Wipro was the first to market indigenous Personal Computers in 1985. This phase saw Wipro expand its horizons rapidly and take advantage of opportunities in the technology space. Wipro entered into the technology business in 1981 and has over 130,000 employees and clients across 54 countries today. IT revenues stood at $ 5.9 billion for the year ended March 31, 2012. Key people: Azim premji (chairman), Suresh Chandra Senapaty (Chief Financial Officer & Executive Director), T. K. Kurien (Executive Director & CEO-Information Technology).

SURVEY OF LITERATURE

A literature review is a survey of already existing writings (usually published) on a given topic or area with a view to assessing their relevance to a proposed project. A literature review is an evaluative report of information found in the literature related to selected area of study. The review should describe, summarize, evaluate and clarify this literature. It should give a theoretical base for the research and help you (the author) determine the nature of your research. Works which are irrelevant should be discarded and those which are peripheral should be looked at critically.

A.GAYATHRIDEVI (2007) in her study entitled A STUDY ON FINANCIAL PERFORMANCE AT EMAMI LTD found out that no. of factors like the current and liquid ratio indicated the short term financial position of Emami Ltd, whereas debt equity and proprietary ratios showed the long term financial position. It was also found out that activity ratios and profitability ratios were helpful in evaluating the efficiency of performance in Emami Ltd. The financial performance of the company for the five years was analyzed and it was proved that the company was financially sound.

GOPAL KUMAR AGARWAL (2009) in his study entitled A Project Report on Ratio Analysis of Financial Statements &Working of Capital Management in HVTL found that the company was earning huge profits and was in good financial health. The financial performance of the company for the nine years was analyzed.

J .RAMAKRISHNA YADAV (2008) A STUDY ON RATIO ANALYSIS in his study found out that the companys overall financial position was in a good condition. After the analysis of Financial Statements, the researcher came to know that company status was good, because the Net working capital of the company was doubled from the previous years position. The company was utilizing the fixed assets properly which resulted in growth of the organization. The company raised fixed deposits from the inception and it became other source of income to the company: Interest on fixed deposits.The financial performance of the company for five years was analyzed.

KAAT RAFIK O. (2010) A PROJECT REPORT ON RATIO ANALYSIS at INDIAN RAYON (A UNIT OF ADITYA BIRLA NUVO LTD) VERAVAL (GUJARAT) found that the company was financially sound. The Companys liquidity and profitability position was good and able to meet the short term solvency and satisfactory return on shareholders funds. The financial performance of the company for the four years was analyzed.

ASHWIN CHAUDHARY & PRIYANKA MAHETA (2008) A PROJECT REPORT ON FINANCIAL ANALYSIS OF WIPRO LTD found that the financial position was in a good condition. Company has enough cash in hand so that in any condition company can take Any Financial decision easily, and all the years has quick ratio exceeding 1, the firm is in position to meet its immediate obligation in all the years. The sales have been continuously increased, but the proportionate expenditure is also rising so overall not making any huge effect on net profit of this company.

RESEARCH METHODOLOGY

STATEMENT OF THE PROBLEM: The statement of problem stated as, In view of the summarized nature of the information contained in financial statements, they need to be analyzed and interpreted by means of financial ratios to enable management and stakeholders understand them and make well-informed business decisions.

BACKGROUND OF THE PROBLEM: Financial information provided in financial statements are useful in business decisions. Thus the use of financial statements in decision-making is not always easy owing to the following problems: Many users of financial statements are not knowledgeable about accounting ratios and how the ratios can be applied to financial statements to aid decision-making. Despite the immense benefits
of ratio analysis, there are a lot of weaknesses or limitations associated with its use.

In view of the above stated problems, this research is embarked upon to identify the proper use of financial ratios, and the roles ratio analysis plays in business decisions.

OBJECTIVES The major objectives of the study are: To determine the Profitability, Liquidity, Leverage ratio and Turnover ratio. To know the Equity position of the company. To know the overall financial position of the company. To offer suitable suggestions based on findings of the study.

HYPOTHESIS Null hypothesis (H0): Company is not managing sundry debtors effectively. Null hypothesis (H0): The firm is not facing any difficulty in making payment to sundry creditor. Null hypothesis (H0): Current liabilities are not increasing then current assets year after year.

SAMPLING DESCRIPTIVE RESEARCH: Descriptive research, also known as statistical research, describes data and characteristics about the population or phenomenon being studied. However, it does not answer questions about, e.g: how/when/why the characteristics occurred, which is done under analytic research. The description is used for frequencies, averages and other statistical calculations. Often the best approach, prior to writing descriptive research, is to conduct a survey investigation. Qualitative research often has the aim of description and researchers may follow-up with examinations of why the observations exist and what the implications of the findings are. Analytical study Analytical study is used to obtain information concerning the current status of the phenomena to analyze with respect to variables or conditions in a situation. Data collection method: The report will be prepared mainly using secondary data.

SAMPLING PLAN Companys previous 5 years financial statements will be used for analysis. Different ratios like Profitability ratio, Liquidity ratio, Leverage ratio, Turnover ratio will be calculated based on the analysis and findings, inference will be drawn.