A Study on Financial Analysis of Selective Indian IT
Companies Based on Specific Ratios – Research Paper
Authored by Dr. Sachin Bhide, Founder and Strategy Designer at Eha Management Consultancy
and Manali Bedekar, Akshata Latthe and Nihal Lodha worked as Summer Interns at Eha Management Consultancy
| Sr.No | Table of Contents | Sr.No | Table of Contents | Sr.No | Table of Contents |
| 1 | Abstract | 2 | Keywords | 3 | Introduction |
| 4 | Objectives of the Study | 5 | Research Methodology | 6 | Literature review |
| 7 | Research gap | 8 | Data Analysis and Interpretation | 9 | Findings |
| 10 | Conclusion | 11 | Limitations of the Research | 12 | Websites |
First published on 22 June 2020 by Eha Management Consultancy
www.ehamanagementconsultancy.comCopyright © 2020 Eha Management Consultancy
Dr. Sachin Bhide asserts the moral right to be identified as the author of this work
All rights reserved. No part of the publication may be reproduced, stored in a retrieval system (including but not limited to computers, disks, external drives, electronic or digital devices, e-readers, websites), or transmitted in any form or by any means (including but not limited to cyclostyling, photocopying, docutech or other reprographic reproductions, mechanical, recording, electronic, digital versions) without the prior written permission of the publisher, nor be otherwise circulated in any form of binding or cover other than that in which it is published and without a similar condition being imposed on the subsequent purchaser.
ISBN 978-93-5407-628-2
Abstract
Ratio analysis is a useful management tool which will improve the understanding of monetary results. Ratio analysis also helps in understanding trends over a period of time. Ratio analysis provides key indicators of organizational performance on a common basis of comparison. Ratio analysis helps in benchmarking within specific industry sector. It is also important to recognize that a single ratio may not provide adequate information to evaluate the strength or weakness of the company. Valuation ratios are the indicators of the company and reflect the likely performance of the company in the near future. The objective of this study was to analyze financial performance of selected Indian information technology (IT) companies using specific ratios. The study was comparative in the nature and was done using only secondary data. The study found that profitability in terms of net profit ratio and return on capital employed of Tata Consultancy Services (TCS), Infosys and Hindustan Computers Limited (HCL) were good. Net Profit Ratio and Return on Capital Employed was found to be low in case of Persistent Systems and Wipro. This study would be helpful in enhancing the knowledge of investors regarding the financial position and growth of information technology (IT) companies for making better investments.
Keyword
Ratio Analysis, Information Technology (IT) Companies, Financial Performance, Financial Analysis
Introduction
Ratio analysis is like litmus test from financial aspect which will improve your understanding of monetary results and trends over time, and supply key indicators of organizational performance. Ratio Analysis plays crucial role for analyzing financial position, liquidity, profitability, risk, solvency, efficiency, and operations effectiveness and proper utilization of funds of the company.
Indian information technology (IT) giants like Infosys, WIPRO and Tata Consultancy Services (TCS) have made their mark globally. Information technology (IT) industry has crucial role in the contribution in the India’s GDP. India, with its huge demographic dividend potential, has emerged because the information technology (IT) hub of the planet. These days’ new employment opportunities are being created in this sector.Objectives of the Study
- To analyze financial performance of Indian information technology (IT) Companies.
- To provide basic knowledge about financial analysis.
- To use Ratio Analysis as a major tool for analyzing performance.
Research Methodology
Research design
The research design used for this study is descriptive research design. Descriptive method describes the subject of the research and it focuses more on “what” of the subject rather than “why” of the subject.
Research design
The research design used for this study is descriptive research design. Descriptive method describes the subject of the research and it focuses more on “what” of the subject rather than “why” of the subject.
Sector
The researchers have taken companies within information technology (IT) industry as information technology (IT) industry is growing rapidly and changing the shape of Indian business standards. So that the process of analysis will be helpful for determining financial strengths and weaknesses of the information technology (IT) companies
Sample Size
The researchers opted for case study method for this research. The specific information technology (IT) companies were selected considering the following criteria. In the case study method, conducting the research with minimum two cases were preferred. The researchers selected five case studies.
Selected Companies:
- Having at least one office in Pune
- Listed on stock exchange
- Variety in terms of scale
Selected Companies:
- Infosys
- Wipro
- Hindustan Computers Limited (HCL)
- Tata Consultancy Services (TCS)
- Persistent Systems
Data collection method
Secondary data has been used for this research. The researchers referred annual reports of companies, previous research papers, journals and other such sources from Internet.
Literature Review
According to Dusan Baran, Andrej Pastyr, Daniela Baranova (2016) the Study is to provide basic knowledge about financial analysis and evaluate business subject progress in the area of activity, liquidity, profitability, and indebtedness, to reveal strengths and opportunities of the business. This analysis is able to identify the factors that with the largest stake have caused undesirable results within the business. Also, it is helpful to predict future development and possible option for bankruptcy.
S. Saigeetha and Dr. S.T. Surulivel (2017)purpose is to identifying cash fluctuations of profitability, liquidity position. Also, to do performance and operational efficiency examination and to test solvency position. After analyzing the ratios, they found that the profits are declining due to increasing cost and decreasing sales during the five years. Therefore, they should try to increase sales volume by reducing costs to improve the profitability position.
P.Srinivasan (2018) conducted a study to evaluate and analyze financial performance and position using ratio analysis. It includes analyzing the balance sheet and profit & loss account for the period of five years. The research shows that the company’s financial performance was not satisfactory and they should take efforts to increase sales by reducing cost for maximizing profits.
According to Dr. Viral Shah and Shreeda Shah the research is to access the financial health, operational proficiency and earning capacity of the company by using financial statement analysis. The analysis gave the insights about the company’s financial position which was declining. So, they should take the corrective to improve it.
Mohammed Nuhu (2014) to be of optimal benefit and as well enable the users make well – informed decisions, financial statements need to be analyzed by means of ratios. Therefore, in order to establish the role of ratio analysis in business decisions, this research is carried out; using NBC Maiduguri Plant was used as the Case study.
Elijah Adeyinka Adedeji (2014) this study was done to analyze how ratio analysis can be used to measure performance of an organization. This study confirmed that there is relationship between ratio analysis and the organizational performance. It says that financial ratios highlight the importance of effective management of the organization.
S. Sabarinathan, V. Jenifer the study includes profitability, cost of goods sold and other overall financial performance of the company. The study has major concentration on ratio analysis from the 5-year balance sheets and profit and loss A/C. Based on the findings, the study says that it will help the management to interpret its weaknesses and problems and certainly help the management in taking financial decisions.
Mahendra Maisuria (2016) the main objective of this study is to analyze the profitability of Indian major information technology (IT) companies. For analyzing profitability researchers used ratio analysis as a tool. Also, one statistical tool is used for analyzing hypothesis.
R Judith Priya, V Sukithangam, J Subhashree, C Uma (2018) the study was made to analyze potential of both Tata Consultancy Services (TCS) and Infosys using valuation ratios. It has been concluded that the value of the Tata Consultancy Services (TCS) is relatively high when comparing with Infosys. Thus, these valuation ratios attract the investors who are interested in regular returns. By the study, Tata Consultancy Services (TCS) has positive impact for greater investment opportunities.
Syeda Saria Musheer and L. Ganesamoorthy (2017) conducted to study the profitability of Information Technology (IT) companies in India. They applied ratios analysis, mean, standard deviation and co-efficient of variation as the tools for analysis. Their study found that profitability in terms of net profit ratio and operating profit ratio is good in case of three companies and low in case of two companies.
Research gap
The researches identified the research gap based on literature review that such research of five Indian information technology (IT) companies having offices in Pune and with specific five ratios was not done before. Hence, the researchers initiated this study.
Data Analysis and Interpretation
Net Profit Ratio
The net profit ratio is that the ratio of after-tax profits to income. It shows the remaining profit after the deduction of all costs of production, administration and financing from sales and income taxes. It is the best measure to see the overall results of the firm as well as to see how well it is using its working capital. It is used to compare the business results with the competitors.
Formula (Net profit ÷ Net sales) x 100
Formula (Net profit ÷ Net sales) x 100
| Company Name | 2016-17 | 2017-18 | 2018-19 | Average |
| Infosys | 21.00 | 22.82 | 18.63 | 20.81 |
| Tata Consultancy Services (TCS) | 22.34 | 21.02 | 21.54 | 21.63 |
| Persistent Systems | 10.47 | 10.64 | 10.44 | 10.51 |
| HCL Technologies | 18.08 | 17.22 | 16.74 | 17.34 |
| Wipro | 15.36 | 14.68 | 15.28 | 15.10 |
| Average | 17.45 | 17.27 | 16.8 | 17.08 |
Interpretation
Net profit ratio measures the overall profitability of the company. It indicates portion of sales available to owners after deducting all expenses and cost, either operating, non-operating, normal or abnormal.
From the above table and graph, researchers interpret that average net profit of Tata Consultancy Services (TCS) is highest in comparison with other four selected Information Technology (IT) companies which are Infosys, Persistent Systems, HCL Technologies, and Wipro. High Net Profit ratio indicates high profitability. Hence, high Net Profit ratio is desirable. It indicates that net profitability of Tata Consultancy Services (TCS) is higher in comparison with other Indian IT Companies. A high ratio is always good because it shows that there is efficient management of affairs of the business.
When researchers compare the average Net Profit Ratio of each company with industry average it can be seen that Infosys, Tata Consultancy Services (TCS), and HCL Technologies are doing extremely well as compared to other companies. Remaining two companies i.e. Wipro and Persistent Systems having poor performance in comparison with industry average.
Return on Capital Employed (ROCE) Ratio
Where,
Return on Capital Employed ratio measures the success of the business in generating satisfactory profit on capital invested. In other words, the ratio measures how well a corporation is generating profits from its capital. ROCE is a crucial profitability ratio and is usually employed by investors to screen for suitable investment candidates.
Formula
| ROCE = | Capital Employed |
| EBIT |
Where,
-
- EBIT: Earnings before interest and tax
| Company Name | 2016-17 | 2017-18 | 2018-19 | Average |
| Infosys | 28.81 | 30.92 | 31.83 | 30.52 |
| Tata Consultancy Services (TCS) | 38.92 | 38.59 | 44.97 | 40.82 |
| Persistent Systems | 15.62 | 14.87 | 20.52 | 17.00 |
| HCL Technologies | 30.87 | 29.22 | 27.65 | 43.87 |
| Wipro | 20.76 | 19.91 | 19.97 | 20.4 |
| Average | 26.99 | 26.70 | 28.98 | 30.48 |
- Capital Employed: Total assets − Current liabilities
Interpretation
Return on Capital Employed (ROCE) measures the profitability of capital employed in the business. It means how efficiently a company can generate profits from its capital employed. Higher ROCE is always desirable.
Among the selected Indian IT Companies average Return on Capital Employed (ROCE) of HCL Technologies is higher. It indicates that companies are efficiently using their profits for the benefit of their business. Investors always invest in companies with stable and increasing ROCE. This ratio can be used for various financial decision making. Companies calculate this ratio to see whether the business has improved its profitability.
From the above data if we compare average net profitability of every company with the industry average i.e. 30.48%, it is seen that Infosys, Tata Consultancy Services (TCS), and HCL Technologies having better performance as compared to other two companies. It indicates that these three companies are efficiently using their capital for growth of the business.
Return on Equity/Net worth (ROE)
Return on equity is used to measure how efficiently management is using company’s assets to create profit. In other words, a ROE indicates a company’s ability to turn equity capital into net profit.
Formula
Return on Equity= Net Income/ Shareholder’s Equity
| Company Name | 2016-17 | 2017-18 | 2018-19 | Average |
| Infosys | 20.80 | 24.68 | 23.71 | 23.06 |
| Tata Consultancy Services (TCS) | 30.49 | 30.33 | 35.18 | 32.00 |
| Persistent Systems | 15.87 | 15.18 | 14.99 | 15.34 |
| HCL Technologies | 26.11 | 23.96 | 24.46 | 24.84 |
| Wipro | 16.43 | 16.69 | 15.95 | 16.35 |
| Average | 21.94 | 22.16 | 22.85 | 22.32 |
Interpretation
Return on Equity/Net worth (ROE) is one of the profitability ratios which measures how company is able to generate profits from the shareholders’ investment in the company. Generally, 15-20% ROE is considered good.
The above table shows that the average ROE of Tata Consultancy Services (TCS) is higher as compared to other four Indian IT Companies. It indicates that the company’s management team is able to efficiently utilize resources provided by investors in equity and accumulated profits of company in generating income.
If researchers compared average ratio of each company with industry average i.e. 22.32%, it shows that Infosys, Tata Consultancy Services (TCS), and HCL Technologies are doing extremely well. The other remaining two companies has comparatively poor performance but their ratio is also good according to range of good ratio stated above.
Earnings Per Share (EPS)
Earnings per share indicates how much a company makes for each share of its stock. A higher EPS indicates more value as any investor will pay more for a company with higher profits.
Formula
Earnings per share indicates how much a company makes for each share of its stock. A higher EPS indicates more value as any investor will pay more for a company with higher profits.
Formula
| ROCE = | Net Income − Preferred Dividends |
| End-of-Period Common Shares Outstanding |
| Company Name | 2016-17 | 2017-18 | 2018-19 | Average |
| Infosys | 62.80 | 71.07 | 35.44 | 56.43 |
| Tata Consultancy Services (TCS) | 133.41 | 134.19 | 83.05 | 116.88 |
| Persistent Systems | 37.68 | 40.39 | 43.99 | 40.68 |
| HCL Technologies | 60.33 | 62.23 | 73.58 | 65.38 |
| Wipro | 34.98 | 16.85 | 14.99 | 22.27 |
| Average | 65.84 | 64.94 | 50.21 | 60.33 |
Interpretation
Earnings Per Share (EPS) is calculated to measure profit available to shareholders on per share basis. Increasing EPS indicates increasing income. It does not indicate how much profit out of that is distributed and how much is retained.
Among all selected Indian IT Companies average Earning Per Share (EPS) of Tata Consultancy Services (TCS) is higher as compared to other companies i.e. Infosys, Persistent Systems, HCL Technologies and Wipro. It indicates that the profit of this is on increasing trends. Companies are doing extremely well in their business.
In comparison with the ratio of industry average i.e. 60.33% performance of Infosys, Tata Consultancy Services (TCS), and HCL Technologies is better in comparison with other two companies.
Return on Asset (ROA)
Return on Asset (ROA) is an important ratio in analyzing profitability of business in relation to the total assets of the company. In other words, this ratio measures how a company efficiently manage its assets for generating the profits of the company. This ratio is very helpful for both the management and investors of the company because it shows how well the company making profits by using its investment in assets.
Formula
Return on Asset (ROA): Net Profit/Assets * 100
| Company Name | 2016-17 | 2017-18 | 2018-19 | Average |
| Infosys | 17.21 | 20.06 | 18.17 | 18.48 |
| Tata Consultancy Services (TCS) | 25.46 | 24.29 | 27.38 | 25.71 |
| Persistent Systems | 12.84 | 12.15 | 12.31 | 12.43 |
| HCL Technologies | 18.80 | 18.16 | 17.27 | 18.07 |
| Wipro | 12.36 | 10.75 | 10.57 | 11.22 |
| Average | 17.33 | 17.08 | 17.14 | 17.18 |
Interpretation
Return on Asset (ROA) is a profitability ratio which indicates relationship between the profits of a firm and investment of a firm. It measures the profitability of investment. Higher ROA is always desirable.
From the selected Indian Information Technology (IT) companies average Return on Asset (ROA) ratio of Tata Consultancy Services (TCS) is high amongst the other four companies. It indicates that the company is efficiently managing its assets for generating its profit. Higher ROA is always better because it shows that the company is earning more money by doing less invest in assets.
In comparison with industry average i.e. 17.18, performance of Infosys, Tata Consultancy Services (TCS) and is better as compared to other two companies. It gives an idea to investors that these companies are earning good returns from their investment.
Findings
The study is case method of research and comparative analysis in nature, the study used only secondary data that was collected from research articles and thesis works already done on the topic and also took the help from the annual reports of 5 Information Technology companies. These companies are Infosys, Tata Consultancy Services (TCS), Hindustan Computers Limited (HCL), Persistent Systems and Wipro. The data of these companies were taken for the quantity of 2016-19, i.e. 3 years. For this study five common profitability ratios are used to measure profitability level in regard to sales, assets investment and shareholders. The findings for the study are as follows:
- Profit margin ratio
- Return on capital employed
- Return on Equity
- Earnings Per Share
- Return on Assets
Conclusion
Information technology (IT) industry is one among the progressive and successful industries in India. Investors also are willing to take a position in shares of the corporate with the view of getting high return through dividend and capital appreciation. Hence the study has been made to analyze profitability of five top information technology (IT) companies in India for the time period of 2016-19. The study applied ratio analysis as way of analysis. The study found that profitability in terms of net profit ratio and return on capital employed of Tata Consultancy Services (TCS), Infosys and Hindustan Computers Limited (HCL) are good, whereas Net profit ratio and return on capital employed were found to be low in case of Persistent Systems and Wipro. Profitability in terms of return on equity is good in case of Tata Consultancy Services (TCS), Hindustan Computers Limited (HCL) and Infosys and profitability performance in this aspect was low in case of Persistent Systems and Wipro. Profitability in terms of Earnings Per Share and Return on Assets ratio, Tata Consultancy Services (TCS) is found to be highest and the ratio was low in case of Wipro. Overall
| Objectives | Conclusion |
| 1. To analyze financial performance of Indian information technology (IT) Companies. | This study would be helpful in enhancing the knowledge of investors regarding the financial position and growth of information technology (IT) companies for making better investments. |
| 2. To provide basic knowledge about financial analysis. | Financial analysis is used to study whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment. |
| 3. To use Ratio Analysis as a major tool for analyzing performance | Managers can use ratio analysis to pinpoint strengths and weaknesses from which strategies and initiatives can be formed. Funders can use ratio analysis to measure results against other organizations or formulating plans of investing in the company |
Limitations to the research
- The ratios are based on historical numbers. Therefore, these ratios always remain same even if performance of the company changes.
- If researchers are using the ratios for analyzing trends, during the period inflationary rate has changed then accuracy of the analysis gets affected.
- The data from the financial statement which researchers are using for the study may have been aggregated in different proportion in the past and therefore doing a trend analysis based on that data doesn’t show a true picture.
- Due to the difference in accounting period, evaluation of the companies becomes challenging.
- A business can do drastic changes in its operations due to certain unexpected needs and thus using the data of the past and making a judgment based on that may not always give a fruitful conclusion.
- Ratio analysis may ignore the qualitative view of the firm.
- The study was only limited to information technology IT sector and also to specific companies.
- In this study the researchers has taken specific five companies so the findings and suggestions are limited to only these companies.
- The researchers have taken only those companies which are having their offices in Pune also.
- The researchers may have made a mistake in any of the ratio calculation in spite of double checking.
Websites
https://www.scribd.com/document/447290246/8-Baran-Pastyr-Baranova-PR-pdf
https://www.coursehero.com/file/55911770/2-issn-IJSRMS-0976pdf/
https://www.scribd.com/document/410290135/AStudyOnFinancialPerformanceUsingRatioAnalysisofVisaSteelLimitedfinal-docx
https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.mcser.org/journal/index.php/%2520jesr/article/download/4399/4302&
ved=2ahUKEwju6ZKD5LrpAhVDJHIKHcuGBrwQFjAPegQIBxAB&usg=AOvVaw07oKd3xvCaKL-RRXUzBKta&cshid=1589714712372
https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.iiste.org/Journals/index.php/RJFA/article/download/16837/17175&
ved=2ahUKEwju6ZKD5LrpAhVDJHIKHcuGBrwQFjAQegQIBhAB&usg=AOvVaw1yBkcgKu6TS0sqEsdZx2gg&cshid=1589714712372
https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.shreeprakashan.com/Documents/20160228081655481.7.Dr%2520Mahendra%2520Maisuria.pdf&ved=
2ahUKEwjakf7y_7npAhXVdCsKHVhWA7oQFjABegQIAhAB&usg=AOvVaw2tBVEDg6lZaat1ndJFKm33
https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.academicjournal.in/download/1581/3-1-499-744.pdf&ved=2ahUKEwif0Lqb-LnpAhX0heYKHfYqB_cQFjAMegQIBhAB&usg=AOvVaw31ZKKmS-fARgNsCyT4RlpD
https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.worldwidejournals.com/global-journal-for-research-analysis-
GJRA/recent_issues_pdf/2017/April/April_2017_1493647310__86.pdf&ved=2ahUKEwjZlPWLnpAhWDfH0KHflWDiwQFjAEegQIBRAB&usg=AOvVaw2nTKiHlRrcgREZXOQT8RK5
https://www.coursehero.com/file/55911770/2-issn-IJSRMS-0976pdf/
https://www.scribd.com/document/410290135/AStudyOnFinancialPerformanceUsingRatioAnalysisofVisaSteelLimitedfinal-docx
https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.mcser.org/journal/index.php/%2520jesr/article/download/4399/4302&
ved=2ahUKEwju6ZKD5LrpAhVDJHIKHcuGBrwQFjAPegQIBxAB&usg=AOvVaw07oKd3xvCaKL-RRXUzBKta&cshid=1589714712372
https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.iiste.org/Journals/index.php/RJFA/article/download/16837/17175&
ved=2ahUKEwju6ZKD5LrpAhVDJHIKHcuGBrwQFjAQegQIBhAB&usg=AOvVaw1yBkcgKu6TS0sqEsdZx2gg&cshid=1589714712372
https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.shreeprakashan.com/Documents/20160228081655481.7.Dr%2520Mahendra%2520Maisuria.pdf&ved=
2ahUKEwjakf7y_7npAhXVdCsKHVhWA7oQFjABegQIAhAB&usg=AOvVaw2tBVEDg6lZaat1ndJFKm33
https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.academicjournal.in/download/1581/3-1-499-744.pdf&ved=2ahUKEwif0Lqb-LnpAhX0heYKHfYqB_cQFjAMegQIBhAB&usg=AOvVaw31ZKKmS-fARgNsCyT4RlpD
https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.worldwidejournals.com/global-journal-for-research-analysis-
GJRA/recent_issues_pdf/2017/April/April_2017_1493647310__86.pdf&ved=2ahUKEwjZlPWLnpAhWDfH0KHflWDiwQFjAEegQIBRAB&usg=AOvVaw2nTKiHlRrcgREZXOQT8RK5