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

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