1. 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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2. 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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3. 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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4. 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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10. 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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11. 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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12. 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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13. 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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14. 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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15. 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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16. 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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17. 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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18. 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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19. 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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20. 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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21. 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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22. 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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