FSA ASSIGNMENT

REPORT ON FINANCIAL HEALTH OF COMPANIES

BY GROUP 3

INDUSTRY – IT

COMPANIES – WIPRO, TCS, INFOSYS.

RATIO ANALYSIS:

Ratio analysis is a quantitative method of gaining insight into a

company's liquidity, operational efficiency, and profitability by studying its
financial statements. Ratio analysis is a cornerstone of fundamental equity
analysis

WHY RATIO ANALYSIS:

Investors and analysts employ ratio analysis to evaluate the financial

health of companies by scrutinizing past and current financial statements.
Comparative data can demonstrate how a company is performing over time and
can be used to telegraph likely future performance. This data can also compare a
company's financial standing with industry averages while measuring how a
company stacks up against others within the same sector.

TYPES OF RATIOS:

LIQUIDITY RATIOS:

Liquidity ratios are measurements used to examine the ability of an

organization to pay off its short-term obligations. Liquidity ratios are
commonly used by prospective creditors and lenders to decide whether to
extend credit or debt, respectively. The type of liquidity ratios is
  Current ratio

 Quick ratio

 Absolute liquid ratio

 Cash position ratio

CURRENT RATIO:

The current ratio is a liquidity ratio that measures a company's ability to

pay short-term obligations or those due within one year. It tells investors and
analysts how a company can maximize the current assets on its balance sheet to
satisfy its current debt and other payables.

QUICK RATIO:

The quick ratio is an indicator of a company’s short-term liquidity

position and measures a company’s ability to meet its short-term obligations
with its most liquid assets. Since it indicates the company’s ability to instantly
use its near-cash assets (assets that can be converted quickly to cash) to pay
down its current liabilities, it is also called the acid test ratio

ABSOLUTE LIQUID RATIO:

The ratio indicates how quickly a firm can repay its current obligations
without depending upon the cash realization from debtors and sale of stock in
trade

CASH POSITION RATIO:

It is the firms cash holding position in relation to its total assets.

SOLVENCY RATIO:
The solvency ratio of an organization gives an insight into the ability of an
organization to meet its financial obligations. Solvency also indicates how much
the organization depends on its creditors and banks can use this when the
organization applies for a credit facility. The type of solvency ratio are as
follows

 Debt equity ratio

 Total debt ratio
 Proprietary ratio
 Interest coverage ratio

DEBT EQUITY RATIO

Debt equity ratio is known as long-term solvency ratio that indicates the
soundness of long-term financial policies of a company. It shows the relation
between the portion of assets financed by creditors and the portion of assets
financed by stockholders. As the debt to equity ratio expresses the relationship
between external equity (liabilities) and internal equity (stockholder’s equity), it
is also known as “external-internal equity ratio”.

TOTAL DEBT RATIO:

This ratio reveals the proportion of debt holder’s contribution to the total
funds invested in the business.

PROPRIETARY RATIO:

The proprietary ratio (also known as the equity ratio) is the proportion
of share holder’s equity to total assets, and as such provides a rough estimate of
the amount of capitalization currently used to support a business. If the ratio is
high, this indicates that a company has a enough equity to support the functions
of the business

INTREST COVERAGE RATIO:

 The interest coverage ratio is a debt ratio and profitability ratio used to
determine how easily a company can pay interest on its outstanding debt. The
interest coverage ratio may be calculated by dividing a company's earnings
before interest and tax (EBIT) during a given period by the company's interest
payments due within the same period.

PROFITABILITY RATIOS:

Profitability ratios are a class of financial metrics that are used to assess

a business's ability to generate earnings relative to its revenue, operating costs
balance sheet assets, and shareholder’s equity over time, using data from a
specific point in time.

 Operating profit ratio

 Net profit ratio
 Return on equity
 Return on capital
 Gross profit ratio

OPERATING PROFIT RATIO:

Operating Profit Margin is a profitability or performance ratio that

reflects the percentage of profit a company produces from its operations, prior
to subtracting taxes and interest charges. It is calculated by dividing the
operating profit by total revenue and expressing as a percentage. The margin is
also known as EBIT (Earnings before interest and tax) Margin.

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. As
such, it is one of the best measures of the overall results of a firm, especially
when combined with an evaluation of how well it is using its working capital.

RETURN ON EQUITY:
Return on equity (ROE) is a measure of financial performance
calculated by dividing net income by shareholder’s equity Because
shareholders' equity is equal to a company’s assets minus its debt, ROE
could be thought of as the return on assets.

RETURN ON CAPITAL:

Return of capital occurs when an investor receives a portion of their

original investment that is not considered income or capital gains from the
investment. Note that a return of capital reduces an investor's adjusted cost
basis Once the stock's adjusted cost basis has been reduced to zero, any
subsequent return will be taxable as a capital gain.

GROSS PROFIT RATIO:

Gross profit ratio is a profitability ratio that shows the relationship

between gross profit and total net sales revenue. It is a popular tool to evaluate
the operational performance of the business. The ratio is computed by dividing
the gross profit figure by net sales.

ACTIVITY RATIOS:

TOTAL ASSETS TURNOVER RATIO:

The asset turnover ratio measures the value of a company's sales

or revenues relative to the value of its assets. The asset turnover ratio can be
 used as an indicator of the efficiency with which a company is using its
assets to generate revenue.

FIXED ASSET TURNOVER RATIO:

The fixed asset turnover ratio (FAT) is, in general, used by analysts

to measure operating performance. This efficiency ratio compares net sales
(income statement) to fixed assets (balance sheet) and measures a company's
ability to generate net sales from its fixed-asset investments,
namely property, plant and equipment. (PP&E).

WIPRO LTD.

Wipro ltd. Incorporated on Dec 29, 1945 is a global information

technology (IT), consulting and business process service provider. It is
headquartered in Bangalore, Karnataka, India. In 2013, Wipro separated its
non-IT businesses and formed the privately owned Wipro Enterprises. It
operates through two segments: IT Services and IT Products. The Company's IT
Services business provides a range of IT and IT-enabled services. IT Products
segment provides a range of third-party IT products, which allows it to offer IT
system integration services.

LIQUIDITY RATIOS OF WIPRO COMPANY:

PARTICULARS 2019 2018 2017

Current ratio 2.33 1.952 2.26
Quick ratio 2.30 1.92 2.22
Absolute liquid ratio 0.95 0.24 0.41
Cash position ratio 0.19 0.05 0.06
Cash defensive ratio 180 121 117

ANALYSIS:

 Liquidity position of the company is better in the year 2019

  The current ratio of the company is almost equal or more than the
standard current ratio which is 2:1 i.e. 2 current assets for every 1 current
liability.

 Change in current ratio is mostly due to rise in cash balance in the year
2019, which is much low in 2018 and 2017

 Quick ratio of the company is good in all the 3 years. Company is in a

situation to pay all its current liabilities

 In absolute liquid ratio, 0.5 is enough to meet the immediate obligations.

In the year 2019 company is holding too much cash and it affects the
profitability.

 In case of cash position ratio of the company, in the year 2019 20% of
the total assets are in the form of cash

SOLVENCY RATIO OF WIPRO COMPANY:

PARTICULARS 2019 2018 2017

Debt equity ratio 0.10 0.14 0.14
Total debt ratio 0.09 0.12 0.12
Proprietary ratio 0.88 0.86 0.86
Interest coverage 21.58 29.75 26.07
ratio

ANALYSIS:

 Procurement of funds for the company is mostly through equity in all the
three years and debt has a small portion of amount.
  In the year 2019, the company reduce the debt to 5,127.90 and increases
the equity shareholder funds to 49,392.

 The proprietary ratio of the company is good in all the 3 years (88% of
the total assets are covered by owners’ funds)

 The interest coverage ratio is 21 times in 2019 which means the operating
profit can cover 21 times of current interest expenses.

 The interest coverage ratio decreased in the year 2019 due to increase in
the total expenses, which are increasing at a higher rate than the revenues.

PROFITABITY RATIOS OF WIPRO COMPANY:

PARTICULARS 2019 2018 2017

Operating profit ratio 0.24 0.26 0.27
Net profit ratio 0.16 0.17 0.18
Return on equity 0.97 1.06 0.99
Return on capital 0.88 0.93 0.87
Gross profit ratio 0.22 0.25 0.25

ANALYSIS:

 Operating profit margin and gross profit ratio of the company is reducing
year on year due to the rise in expenses and interest payments
 The return on equity of the company is good in the year 2018, as the
return on equity decreased in 2019, company must concentrate on its
expenses and should increase its profit.
 Return on capital is also the same as return on equity, the company must
increase its performance to increase bot ROE and ROC

ACTIVITY RATIO OF WIPRO COMPANY:

 PARTICULARS 2019 2018
Total asset turnover ratio 0.91 0.86
Fixed asset turnover ratio 10.98 10.24
Average collection period 374.1 338.6

Cash turnover ratio 7.57 15.31

ANALYSIS:

 Asset turnover ratio of the company is good in 2019 compared to 2018, It

used 91% of total assets to generate sales.
 Company is generating 10.98 rupees for every 1 rupee of fixed asset in
2019

INFOSYS LTD:

Infosys Limited is an Indian Information Technology company that

provides global business consulting and information technology services.
Infosys helps clients in 45 countries to create and execute different strategies for
their digital transformation. Infosys helps businesses to renew & improve
existing conditions so that their business can achieve higher efficiencies and
stay relevant according to current times.  Infosys has more than 200,000
employees and through their hard work & dedication, Infosys has grown to
become a US $10.9 billion (revenues FY18) company with a market
capitalization of US $39 billion.

LIQUIDITY RATIO OF INFOSYS COMPANY

PARTICULARS 2019 2018 2017
Current ratio 2.60 3.27 3.23
Quick ratio 2.60 3.27 3.23
Absolute liquid ratio 1.01 1.44 1.61
Cash position ratio 0.25 0.26 0.28
Cash defensive ratio 194 236 261

ANALYSIS:

 Liquidity position of the company is better in the year 2017 when

compared to 2018 and 2019

 The current ratio of the company is higher in 2017 with 2.60 it indicates
that company can pay its current liabilities. The higher the current ratio
the better is the business.

 Quick ratio for all the three years is good. In 2018 the company has high
quick ratio with 3.27 then it has fallen to 2.60 in year 2019 company has
enough quick assets to pay for its current liabilities.

 Absolute liquid ratio is greater than 1 from 2017-19 which is not a good
sign because the company is maintain more cash than required.

SOLVENCY RATIO OF INFOSYS COMPANY:

PARTICULARS 2019 2018 2017

Debt equity ratio 0.00 0.00 0.00

Total debt ratio 0.00 0.00 0.00
Proprietary ratio 1.00 1.00 1.00
Interest coverage - - -
ratio
ANALYSIS:

 The debt equity and total debt of the company is zero because company
rely totally on equity for its funds.
 Since the company has no debt, there are no interest expense and hence
there is no concept of interest coverage ratio.
 The proprietary ratio of the company is 1 which means companies total
assets are covered by owners’ funds.

PROFITABILITY RATIO OF INFOSYS COMPANY

PARTICULARS 2019 2018 2017

Operating profit ratio 0.29 0.34 0.34
Net profit ratio 0.20 0.26 0.23
Return on equity 1.17 0.98 0.87
Return on capital 1.17 0.98 0.87
Gross profit ratio 0.29 0.34 0.34

 Operating profit margin of the company has same ratio in 2017 and 2018
with 0.34 but in 2019 it has reduced to 0.29 due to the rise in expenses
and interest payments
 In 2018 net profit ratio of the company is with 0.26, high ratio indicates
efficient management.
 The return on equity and return on capital ratio is increasing year by year
from 2017 to 2019 it is good sign for the company as it is using money
efficiently.

ACTIVITY RATIO OF INFOSYS COMPANY:

PARTICULARS 2019 2018
Total asset turnover ratio 1.15 0.94
Fixed asset turnover ratio 7.44 6.97
Average collection period 348 347
Cash turnover ratio 4.52 3.44

 Asset turnover ratio of the company is high in 2019 with 1.15 compared
to 2018 ratio with 0.94, it indicates that company is using its assets
efficiently to generate sales.
 Company is generating 7.44 rupees for every 1 rupee of fixed asset in
2019

TATA CONSULTANCY SERVICES PVT LTD

LIQUIDITY RATIOS
1. CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

It speaks about the liquidity position of the company. Does the company have
adequate Current Assets to cover the Current Liability? The very high current
ratio indicated that the company is blocking funds.
YEAR CURRENT RATIO
2019 2.86
2018 2.58
2017 2.71
TCS is having adequate current ratio, so the company is in a good position to
pay its current liabilities.
2. QUICK RATIO = (CURRENT ASSETS-STOCK-PREPAID EXPENSES /

CURRENT LIABILITIES).

Quick Assets are the Assets which can be converted into cash quickly. The ratio
indicates immediate loan repaying ability.
YEAR QUICK
RATIO
2019 2.86
 2018 2.58
2017 2.70
Here, TCS has enough quick assets to pay the current liabilities.

3. ABSOLUTE LIQUID RATIO = (CASH+BANK+MARKETABLE

SECURITIES)/CURRENT LIABILITIES
This ratio indicates how quickly a firm can repay its current obligations without
depending upon cash realization from debtors and sales of stock in trade.
YEAR ABS LIQUID RATIO
2019 0.58
2018 0.41
2017 0.29

The company can pay 0.58 rupee for every 1 rupee of current liability without
depending upon cash realization from debtors and sales of stock in trade.

4. CASH POSITION RATIO = (CASH+CASH EQUIVALENCE)/TOTAL ASSETS

It is the firms cash holding position in relation to its total assets.

YEAR CASH POSITION RATIO
2019 0.14
2018 0.08
2017 0.05
In 2019, TCS is holding 0.14 rupee for every 1 rupee of total assets.

5. CASH DEFENSIVE RATIO = (CASH+MARKETABLE SECURITIES+ACC

RECEIVABLE) / AVG DAILY EXPENDITURE

This ratio is expressed in terms of No. of days. Even if the cash earning from
revenue stops, how long does the existing holding of cash reservoir will be
capable to maintain the normal operating activities of business, while
calculating the Avg. daily expenses we do not consider the non-cash
expenditure of P&L a/c.
YEAR CASH DEFENSIVE
RATIO
2019 44
2018 29
 2017 18

In 2019, TCS can maintain 44 days with the existing cash reservoir to maintain
the normal operating activities of Business.
ACTIVITY RATIOS
1. INVENTORY TURNOVER RATIO = COGS/AVG STOCK
INVENTORY TURNOVER DAYS = 365/INVENTORY TURNOVER DAYS

It can be expressed as a No. of days. It speaks about the efficiency in managing

Inventory. Higher ratio is regarded as efficient. A short stay of inventory in
warehouse may be due to forced sale at lower prices.

YEAR INVENTORY TURNOVER INVENTORY TURNOVER

RATIO DAYS
2019 2.22 164
2018 3.66 100
2017 4.48 82

2. DEBTORS TURNOVER RATIO= CREDIT SALES/ AVG DEBTORS

DEBTORS TURNOVER DAYS = 365/DEBTORS TURNOVER DAYS

In this case DTR, the greater the number, the more efficient is the Receivables
management. The smaller the number of days, the more efficient is the
collection management.
YEAR DEBTORS TURNOVER DEBTORS TURNOVER
RATIO DAYS
2019 5.60 65
2018 5.18 71
2017 5.22 70

3. CASH TURNOVER RATIO = NET SALES/AVG CASH

It reveals the number of times that cash in turned over in an accounting period.
This ratio is ideal for companies that do not offer credit sales.
YEAR CASH TURNOVER RATIO
2019 14.64
2018 21.77
 2017 28.43

4. CURRENT LIABILITIES RATIO = NET SALES/ AVG CURRENT

LIABILITIES
This ratio assesses the proportion of total liabilities that are due in the near term.
This ratio is considered as a secondary measure of liquidity since it does not
measure the company’s ability to pay for the liabilities.
YEAR CURRENT LIABILITIES
RATIO
2019 14.64
2018 21.77
2017 28.43

5. WORKING CAPITAL TURNOVER RATIO = NET SALES/AVG

WORKIG CAPITAL
This ratio is expressed in the No. of days provides the measure for long term
liquidity. The larger the No. of days, the lesser is the liquidity. The intensity of
liquidity can be expressed through how quickly the Assets can be converted into
cash.
YEAR WORKING CAPITAL TURNOVER
RATIO
2019 14.64
2018 21.77
2017 28.43

ASSETS MANAGEMENT EFFICIENCY RATIOS

1. FIXED ASSETS TURNOVER RATIO = SALES/AVG FIXED ASSETS

This ratio measures the operating performance of the company and the
company’s ability to generate net sales from its fixed asset investments.
YEAR FIXED ASSETS TURNOVER RATIO
2019 12.07
2018 10.40
2017 10.08
 TCS is generating 12.07 rupee for every 1 rupee on fixed assets.
2. TOTAL ASSETS TURNOVER RATIO = NET SALES/AVG
TOTAL SALES
This ratio indicates the company’s ability to generate sales from its total
assets.
YEAR TOTAL ASSETS TURNOVER
RATIO
2019 1.63
2018 1.40
2017 1.34
TCS is generating 1.64 rupees for every 1 rupee of its total assets in 2019.
3. OPERATING CYCLE = STOCK TURNOVER PERIOD+DEBTOR
TURNOVER PERIOD
This cycle is the average period required for a business to make an initial
outlay of cash to produce goods, sell the goods, and receive cash from
customers in exchange for the goods.
YEAR OPERATING CYCLE DAYS
2019 229
2018 170
2017 152

SOLVENCY RATIOS
1. DEBT EQUITY RATIO = LONG TERM LIABILITIES /
SHAREHOLDERS FUNDS
This ratio reveals the relationship between long term liabilities and owner’s
capital.
YEAR DEBT EQUITY RATIO
2019 0.001
2018 0.003
2017 0.003

A ratio greater than 1 signifies higher long-term debt financing than equity
financing. As TCS ratio is less than 1 it signifies that equity is more than debt.
2. TOTAL DEBT RATIO = TOTAL DEBT/TOTAL CAPITAL (total
equity + total debt)
This ratio reveals the proportion of debt holder’s contribution to the total
funds invested in the Business.
YEAR TOTAL DEBT RATIO
2019 0.14
2018 0.56
2017 0.59

In 2019, TCS Debt holder’s contribution to the total funds invested in the
business is 0.14 rupee of every 1 rupee.
3. PROPRIETARY RATIO = SHARE HOLDERS FUNDS / TOTAL
ASSETS
This Ratio will assess the portion of the Assets covered by owners’ funds.
YEAR PROPRIETARY RATIO
2019 0.97
2018 0.98
2017 0.98

In TCS, in 2019 0.97 % of the assets are covered by owners’ funds.

4. INTEREST COVERAGE RATIO = EBIT / INTEREST EXPENSE

It is also called as TIMES INTEREST EARNED RATIO. It indicates how
far the creditors are protected. It shows the availability of returns is enough
to cover the interest expense or not.

YEAR INTEREST COVERAGE

RATIO
2019 221
2018 695
2017 1141
 5. DEBT SERVICE COVERAGE RATIO = EBIT / INTEREST+
LONG TERM DEBT MATURED
This ratio examines the ability of the firm to generate enough funds to meet
its commitment to pay interest and Annual loan repayments or maturities.
YEAR DEBT SERVICE COVERAGE
RATIO
2019 168
2018 121
2017 113

PROFITABILITY RATIOS
1. GROSS PROFIT RATIO = (GROSS PROFIT / NET SALES) *100
This is used to evaluate the operational performance of the business. It shows
the relationship between the gross profit and net sales revenue.
YEAR GROSS PROFIT RATIO
2019 0.30
2018 0.29
2017 0.31

In 2019, TCS gross profit is 30% of total net sales revenue.

2. OPERATING PROFIT RATIO = (OPERATING PROFIT/ NET

SALES) *100
It speaks about how much profit a company makes after paying for variable
cost of production such as wages, raw materials etc. it is also expressed as a
percentage of sales and ten shows the efficiency of a company controlling
the costs and expense associated with business operations.

YEAR OPERATING PROFIT RATIO

2019 0.30
2018 0.29
2017 0.31

3. NET PROFIT RATIO = (NET PROFIT / NET SALES) *100

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.

YEAR NET PROFIT RATIO

2019 0.22
2018 0.21
2017 0.22

4. RETUEN ON EQUITY = NET INCOME / SHAREHOLDERS

FUNDS
It is an indicator which tells us how efficiently the company is using its equity
financing for every 1 rupee invested by the shareholders, the company is
generating how much profit. If the company’s ROE is increasing year on year,
its profit generating capacity is increasing. Higher the ROE, it is better.

YEAR RETURN ON EQUITY

2019 0.35
2018 0.30
2017 0.31

5. RETURN ON TOTAL CAPITAL = NET INCOME / TOTAL

CAPITAL
It tells how efficiently the company is using the debt and equity financing for
generating profit. Higher ROTC better. We must also see whether the profits are
from its operations and not because of currency fluctuations.

YEAR RETURN ON TOTAL

CAPITAL
2019 72
2018 59
2017 54

DUPONT ANALYSIS
Importance:
It provides a broader picture of the return of the company. It tells where the
company lies and where there is a room for improvement.