RATIO SELECTION CRITERIA

The various ratios that have been selected for the purpose of performing
financial analysis are as follows:Gross Profit Ratio This ratio has not been used for analyzing the
performance of Mindtree as Mindtree is a services company and not a
manufacturing firm. For a services firm we look at the operating profit
ratio.
Operating Profit Ratio - The operating margin ratio demonstrates how
much revenues are left over after all the variable or operating costs have
been paid. This ratio shows what proportion of revenues is available to
cover non-operating costs like interest expense. This ratio is important to
both creditors and investors because it helps show how strong and
profitable a company's operations are.
Net Profit Ratio The net profit percentage is the ratio of after-tax
profits to net sales. It reveals the remaining profit after all costs of
production, administration, and financing have been deducted from
sales, and income taxes recognized. It is the best measures of the overall
results of a firm.
Return on Equity - The amount of net income returned as a percentage
of shareholders equity. Return on equity measures a corporation's
profitability by revealing how much profit a company generates with the
money
shareholders
have
invested.
Return on Assets - An indicator of how profitable a company is relative
to its total assets. ROA gives an idea as to how efficient management is
at using its assets to generate earnings.
Fixed Asset Turnover Ratio - A financial ratio of net sales to fixed
assets. The fixed-asset turnover ratio measures a company's ability to
generate net sales from fixed-asset investments from property, plant and
equipment net of depreciation. A higher fixed-asset turnover ratio shows
that the company has been more effective in using the investment in
Fixed assets to generate revenues.

Net Working Capital Turnover Ratio - The working capital ratio, also
called the current ratio, is a liquidity ratio that measures a firm's ability
to pay off its current liabilities with current assets. The working capital
ratio is important to creditors as it shows the liquidity of the company.
The faster the assets can be converted into cash, the more likely the
company will have the cash in time to pay its debts.
1.

Current Ratio - The current ratio is a financial ratio that measures

whether or not a firm has enough resources to pay its debts over the
next 12 months. It compares a firms current assets to its current
liabilities.
2.
Quick Ratio The quick ratio is different from the current ratio as it
excludes certain current assets that are included in the calculation of the
current ratio. The most significant asset that is excluded from the quick
ratio is inventory, as it is not considered liquid as compared to some of
the other current assets like cash and cash equivalents.
Debtors Turnover Ratio This is also called receivable turnover ratio.
The ratio is intended to evaluate the ability of a company to efficiently
issue credit to its customers and collect funds from them in a timely
manner. A high turnover ratio may indicate the following:a) A conservative credit policy.
b) An aggressive collections department.
c) A number of high-quality customers.
A low turnover ratio may represent the following:a) An opportunity to collect excessively old accounts receivable that
are unnecessarily tying up working capital.
b) A loose or nonexistent credit policy.
c) An inadequate collections function.
d) A large proportion of customers having financial difficulties.
e) An excessive amount of bad debt.
Creditors Turnover Ratio - This is also known as the accounts payable
turnover ratio. Accounts payable turnover is a ratio that measures the
speed with which a company pays its suppliers. If the turnover ratio
declines from one period to the next, this indicates that the company is
paying its suppliers more slowly, and may be an indicator of worsening
financial condition. If a company is paying its suppliers very quickly, it
may mean that the suppliers are demanding very fast payment terms, or
that the company is taking advantage of early payment discounts.
Liquidity Ratio This is used to determine a companys ability to pay
off its short term debt obligation.
Debt-Equity Ratio This indicates the relative proportion of
shareholders equity and debt used to finance companys assets. This
ratio is also known as leverage.
Debt-Asset Ratio - Total debt to total assets is a leverage ratio that
defines the total amount of debt relative to assets. This enables
comparisons of leverage to be made across different companies. The
higher the ratio, the higher the degree of leverage, and
consequently financial risk.
Price to Earnings Ratio - The price-earnings ratio indicates the amount

an investor can expect to invest in a company in order to receive 1

Rupee
of
that
companys
earnings.
Price to Book Ratio - A lower P/B ratio could mean that the stock is
undervalued. However, it could also mean that something is
fundamentally wrong with the company. This ratio varies by industry.
This ratio also gives an idea to the investor whether he is paying too
much for what would be left if the company went bankrupt immediately.
Dividend Yield - It indicates how much a company pays out
in dividends each year relative to its share price. Dividend yield is
represented as a percentage and can be calculated by dividing the
amount of dividend paid in a given year per share of stock held by the
price of one share of stock.

ANALYSIS OF INFORMATION PROVIDED BY THE RATIOS

Mindtree is a information technology services firm. Therefore, we have not
used the Gross Profit Margin in order to analyze the financial performance
of this firm since GPM is used to analyze the profitability and performance
of manufacturing firms only.
We have used the benchmark for calculation as 2. This is based on the
following calculation:Benchmark = (Number of Years + 1)/2 = (3+1)/2 = 2
1. Operating Profit Ratio The change in operating profit margin for
Mindtree has been 2.01 YoY. Although, there was a drop in the
operating profit margin from 2014 to 2015 by 0.40%, the operating
profit margin has been fairly stable. This implies the following
things:a) There is acceptability of the products of Mindtree in the market
and amongst its customers and their pricing strategy is in line
with the demand of its products.
b) Overall, the company is able to pass on its costs to the customer
with a fairly stable operating profit ratio
c) It has the right product mix required to sustain in the market
d) The operating profit margin can be broken down as follows:(Gross Profit/Sales) (Administration and Selling Expenses/Sales)
Ability to maintain a stable operating profit margin implies that
the organization is able to manage and has control over its
administration and selling costs and is able to maintain its cost
efficiency. However, since there is a decrease in operating
profit ratio from 17.45% in 2014 to 17.05% in 2015 even
though the sales has increased from Rs 30316 million to
Rs 35619 million, it means that the company has become

cost inefficient in the past year and there has been some
problem for the company in managing its administration
and selling expenses. This is evident from the fact that
operating expenses of the company have increased from
Rs 25,025 million to Rs 29,545 million. The majority of
these expenses are a result of increase in the employee
benefits.
2. Net Profit Ratio The NPR for three years has been as follows:-

Net Profit
Ratio

2013
14.37%

2014
14.87%

2015
15.06%

There has been a consistent increase in the net profit ratio from
14.37% in 2013 to 14.87% in 2014 to 15.06% in 2015. This means
that the profitability of the company has increased. A net profit ratio
of 15.06% means that the company is earning a profit of Rs 15.06
for every Rs 100 of sales. In the previous years it was only Rs 14.37
and Rs 14.87 for every Rs 100 of sales.

3. Fixed Assets Turnover Ratio The fixed assets turnover ratio of

Mindtree has decreased from 9.12 in 2013 to 8.82 in 2014 and 6.41
in 2015.

Fixed
Assets

2013
9.12

2014
8.82

2015
6.41

Turover
Ratio
The fixed assets turnover ratio has substantially decreased
over the three year period signifying that the company is
not able to utilize its fixed assets efficiently in generating
revenues. The fixed asset ratio gives the revenue earned in rupees
for every rupee of investment in fixed assets. Thus, in the year 2013
the company was able to earn Rs 9.12 in revenue for every 1 Rupee
investment in fixed assets. This decreased to Rs 6.41 of revenue
earned for every rupee of investment in fixed assets in the year
2015.
4. Current Ratio The current ratio for Mindtree has changed as
follows:-

Current
Ratio

2013
2.78

2014
3.07

2015
2.43

The current ratio denotes the ability of the organization to meet its
current liabilities that is liabilities over a 12 month period by its
current assets. As per data from creditguru.com, the ideal current
ratio for services industry is 1.29. This ratio is higher than 1.29 but
less than 3 in the year 2015. A higher current ratio in 2014 which
was 3.07, means that the company is not able to manage its current
assets well i.e. it is either not able to secure financing or is not able
to manage its working capital well. However, this has improved in
2015.
5. Receivables Turnover Ratio (or) Debtors Turnover Ratio
The ratio for Mindtree has changed as follows:-

Debtors
Turnover
Ratio

2013
5.24

2014
5.05

2015
5.12

The debtors turnover ratio denotes the ability of the organization to

extend credit to its customers. The ratio has increased from 5.05 in
2014 to 5.12 in 2015. This indicates that the acceptability of the
products or services of Mindtree has increased in the market or the
collection department is incentivizing payments by offering cash
discounts as can be seen since the collection period has decreased
from 72 days to 71 days.

6. Liquidity Ratio The ratios for the three years is as follows:-

Liquidity
Ratio

2013
0.34

2014
0.27

2015
0.62

The liquidity ratio for the company has increased from 0.27 in 2014
to 0.62 in 2015. Thus, the ability of the company to meet its
liabilities in the short term has improved.
7. Debt-Equity Ratio The ratio for the three years is as follows:The debt-equity ratio of the company has increased from 0.01 to
0.02. As per industry standards the debt-equity ratio should be 0.75
for a services company (data taken from creditguru.com). Thus, this
is within the permissible limit.

Debt-Equity Ratio
0.020
0.018
0.016
0.014
0.012
0.010
0.008
0.006
0.004
31/3/2015

31/3/2014

31/3/2013

8. PB Ratio - The ratio for the three years is as follows:The price to book ratio of the company has increased over years.
This means that the wannabe shareholders have to pay more to
claim the earnings of the company.

Price to Book Ratio

6.00
5.00
4.00

Price to Book Ratio

3.00
2.00
1.00
31/3/2015

31/3/2014

31/3/2013

9. Dividend Yield The ratio for the three years is as follows:The company has paid more dividend to its shareholders in the year
2015. The dividend has increased from Rs 6 in 2013 to Rs 12.50 in
2014 to Rs 17 in 2015.

Dividend Yield
1.40%
1.30%
1.20%
1.10%
1.00%
0.90%
0.80%
0.70%
0.60%
31/3/2015

10.

31/3/2014

31/3/2013

Net Working Capital Turnover Ratio

Net Working Capital Turnover ratio increased in 2015 to 4.09 after a

drop in 2014, which shows that Mindtree has used the working
capital to generate better sales in 2015 over the years. Moreover
since the index value of 2.04 signifies that things are stable ( it is
above 2) over the years.

11.

ROE and ROA

The index value for ROE and ROA are stable as both are 2. (2.01 and
2 respectively)

ROE vs ROA
33.00%
32.00%
31.00%
Return on Equity

30.00%

Return on Assets

29.00%
28.00%
27.00%
26.00%
25.00%
31/3/2015

31/3/2014

31/3/2013

12. Working Capital Leverage

Working
capital
leverage

2013

2014

1.16

1.15

2015
1.17

Working capital leverage over the years has been stable as evident
from the above table and the stability means that the firm has
maintained the similar level of change in investment in current asset
to level of change in ROI.

13. Debtors Turnover Ratio

Debto
rs
Turnov
er
Ratio

2013
5.24

2014
5.05

2015
5.12

Debtors turnover ratio decreased in 2014 from 2013 and this

change signifies that Mindtree reduced its operation of sales on
credit and the increase in the value from 2014 to 2015 signifies that
again it more sale on credit. The fluctuations could be explained on
the usual IT demand for these years. The index is 1.99 means the
fluctuations are in stable range.
14. Creditors Turnover Ratio
The credit turnover ratio increased in 2014 from 2013, which means
that the firm was taking more time to clear the credits and the ratio
fell in 2015 which means that firm was taking less time to pay its
creditors. Moreover the index value of 1.89 shows that the ratio is
on decreasing trend which is good for Mindtree as it is a service
firm.

Creditors Turnover Ratio

350.00
300.00
250.00
200.00
150.00
100.00
50.00
31/3/2015

31/3/2014

31/3/2013

INTERPRETATION OF RATIOS IN COMBINATION

WITH ANNUAL REPORT ANALYSIS
1. Net profit ratio has consistently increased over the years which is
consistent with the increase in revenue from business demand from US
and Euro market over the years as mentioned in the annual report.
2. Price to Book ratio has increased over the years and its PE is better
than most of its competitors. These signify that people are willing to spend
more into the firm for its shares considering future growth prospects. This
is also consistent with the more business demand as mentioned in annual
report.
3. Cash flow yield has increased over the years and this signifies better
working capital management. This is once again reflected in better Net
profit ratio.
4. There has been a decrease in the operating profit ratio from 17.45% in
2014 to 17.05% in 2015 even though the sales has increased, it means
that the company has become cost inefficient in the past year and there
has been some problem for the company in managing its administration
or selling expenses. The operating expenses of the company have
increased due to employee benefits.
5. The increasing trend in liquidity ratio over the years signifies that
company is aggressive in its outlook for growth and the increasing trend
shows a bit of risk taking in cash management.