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 o f 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 ofthese 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 betterunderstanding of a firm’s 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
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 iscompared 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
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
most important measure of performance in an accounting sense. Return on Equity (ROE)
measures the firm’s ability to earn a return on the owner’s 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 firm’s 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 firm’s 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 company’s 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.
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 "informationtechnology" 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 (1450 – 1840),
electromechanical (1840 – 1940) 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 IT – ITES 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 IT – BPO 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 IT – ITES 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 industry’s 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. Generallydominant 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 theestablishment 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 wereused in large companies and research laboratories. In 1968 Tata Consultancy Services —
established in SEEPZ, Mumbai by the Tata Group — were 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 largescientific workforces many as 10,000 Indians were estimated to have settled in the US. By the1980s a number of engineers from India were seeking employment in other countries. Inresponse, the Indian companies realigned wages to retain their experienced staff. In theEncyclopedia of India, Kamdar(2006) reports on the role of Indian immigrants (1980 - early1990s) 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 andher successor Rajiv Gandhi that electronics and telecommunications were vital to India's growthand development. MTNL underwent technological improvements. During 1986-1987, the Indiangovernment 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).
Tata Consultancy Service (TCS) is the world’s 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 ―Tat a
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 inBangalore, 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 tomorrow’s 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
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 liquidratio 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 company’s 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 year’s 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
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 toanalyze with respect to variables or conditions in a situation.
Data collection method: The report will be prepared mainly using secondary data.
SAMPLING PLAN
Company’s previous 5 years financial statements will be used for analysis.
Different ratios like Profitability ratio, Liquidity ratio, Leverage ratio, Turnover ratio will becalculated based on the analysis and findings, inference will be drawn.
