FINANCIAL RATIO ANALYSIS

Submitted By: Kinnar Majithia PGDBM 2010-12 Roll No: P1026

Sydenham Institute of Management Studies, Research and Entrepreneurship Education

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.

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

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 didnt 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 4

PERFORMANCE HIGHLIGHTS (2009-10)

FINANCIAL STATEMENTS
PERFORMANCE SUMMARY

BALANCE SHEET (Consolidated)

PROFIT AND LOSS ACCOUNT (Consolidated)

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 Companys 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 Current Ratio 2.26

Mar 2009 - Apr 2010 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 Quick Ratio 2.25 Mar 2009 - Apr 2010 1.87

The quick ratio value being higher than 1 indicates that the quick assets are enough to pay out the quick liabilities. Its 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 owners fund It indicates: o The capital structure of the company o Long-term financial and solvency position

Debt-Equity Ratio

Mar 2008 - Apr 2009 0.04

Mar 2009 - Apr 2010 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 creditors 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 784.41 Mar 2009 - Apr 2010 684.43

Interest-coverage Ratio

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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

Stock Turnover ratio

Mar 2008 - Apr 2009 1321.77

Mar 2009 - Apr 2010 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 companys 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

Fixed Asset Turnover Ratio

Mar 2008 - Apr 2009 5.15

Mar 2009 - Apr 2010 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

Debtors 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

Debtors Turnover Ratio

Mar 2008 - Apr 2009 4.62

Mar 2009 - Apr 2010 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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 Debtors Collection Period / Debtors Velocity Ratio

It is, again, an indication of the efficiency of the firms 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

Debtors Collection Period

Mar 2008 - Apr 2009 79

Mar 2009 - Apr 2010 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 20082008-09

PROFITABILITY RATIOS

Net Profit Ratio

It indicates a firms 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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Net profit before tax ratio Net profit after tax ratio

Mar 2008 - Apr 2009 22.11 18.9

Mar 2009 - Apr 2010 27.61 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 Companys 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

Gross Profit Ratio (%)

Mar 2008 - Apr 2009 25.01

Mar 2009 - Apr 2010 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 26.87 Mar 2009 - Apr 2010 28.93

Operating Ratio (%)

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 26.87 Mar 2009 - Apr 2010 28.93

Operating Profit Ratio (%)

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The Operating Profit in relation to Net Sales ratio went up in 2009-10 over its value in 200809 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 43.27 Mar 2009 - Apr 2010 42.46

Return on capital employed (%)

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 Proprietors Fund

It is a type of ROI, known as Return on Equity It indicates the available return on shareholders funds It determines the profit generated by the owners

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Return on proprietors fund (%)

Mar 2008 - Apr 2009 33.7

Mar 2009 - Apr 2010 38.1

There is an increase in the value of the ratio for the financial year 2009-10 over its previous years 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 shareholders fund o Profitability of the company and efficient utilization of the funds Mar 2008 - Apr 2009 39.1 Mar 2009 - Apr 2010 44.6

Return on Equity Capital (%)

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 owners point of view Mar 2008 - Apr 2009 26.81 Mar 2009 - Apr 2010 35.67

EPS

An increase In the EPS value in the year 2009-10 over the previous year indicates a higher earning value for the shareholders 20

 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 14 Mar 2009 - Apr 2010 20

DPS

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 30.54 Mar 2009 - Apr 2010 65.45

Dividend Payout (%)

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, investors confidence It indicates the no. of times the market price is higher or lower compared to EPS Mar 2008 - Apr 2009 10.07 Mar 2009 - Apr 2010 21.89

PE Ratio

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

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