Financial Performance-

Financial Tools to evaluate the performance of

Infosys and TCS

Module: Management Accounting & Finance

Presented By:

GM Masud

Student ID: S1103954

Presented For:

Dr. Muhammad Ashfaq & Lasantha De Silva

 1. Introduction
In order to continue with the growth and expansion, achieving profitability in an enterprise is a
vital aspect for consideration. Irrespective of the nature of the organization, the manager is
responsible for designing a comprehensive plan, and implement it towards the fulfilling of the
tasks and activities of the company. When executed properly, it involves a series of decisions
from the manager’s end (Jones and George 2006). Strategic plans are designed by the managers
in order to achieve the goals of the organization via a host of performance measurement tactics.
The financial analysis is an important performance indicator for any company with respect to the
efficiency, liquidity, and profitability. In order to evaluate the financial performances between
two major IT entities (TCS and Infosys), their weakness, and investment opportunities, the ratio
analysis has been used as the financial performance measuring technique.

The Management Accountants of companies measure their past performances using the financial
situation, but it doesn’t seem to be enough. With the advent of the information age, using the
financial data as the sole basis of performance measurement is considered inadequate,
encountering the global economic unification, which is qualified by the computing of demand
and supply chains (Muhammad, 2010). This is where the tool, known as the Balanced Scorecard
is included to access both the financial, and the non financial scopes of performance. Both the
financial, and the non financial factors in the performance measurement of companies are
important, because when merged into the system, superior results will be the outcome (Kairu,
Wafula, Okaka, Odera & Akerele, 2013). The prime motive of this paper is to evaluate the
financial strengths and the weakness using the tools (Ratio Analysis, and Balance Scorecard) in
comparing and measuring the performances of the organizations.

2. Literature Review

As early as 1966, there was an anticipation that the prediction of the financial performances of
the companies is possible via the financial rations (Beaver, 1966). Several studies have been
undertaken in order to validate the financial ratios to demonstrate the financial functioning of
firms and organizations (Altman and Narayanan, 1977; Norton and Smith, 1979; Mensah, 1983;
Boardman and Vining, 1989; Commander et al, 1996; La Porta et al, 1997). The financial ratios
are categorized into profitability, liquidity, solvency, and active ratios by the researchers (Ross et
al, 2007). The ratio analysis has benefits and is a well recognized technique for analyzing the
financial performance of companies (Lermack, 2003). The technique, ratio analysis is basically
used as a planning and control tool aiding in the analyzing the functioning of the enterprises.

Another excellent management technique to communicate the strategy of an organization is

known as the Balanced Scorecard (Kalpan and Norton, 1992). It is believed that the Balance
Scorecard is a holistic model that connects the business goals and the individual
accomplishments. This management tool has acquired the acceptance as a strategic tool for
measuring the performance of companies. The motive behind the tool has been to address the
strategy development process and evaluating the strategy performance measurement
continuously. This is implemented by categorizing the performance measurement into four inter-
connected factors: Financial, Internal Business Processess, Customer, and Innovative and
Learning. It can be concluded that the Balance Scorecard is a vital management tool as it can
include both the financial and non financial variables in order to evaluate the organizational
performances. The objective of this paper has been to help the readers understand how the tools
(Ratio analysis and Balance Scorecard) are used to evaluate the financial positions of the two
firms (Infosys and TCS). In order to bring forth the complete process of the financial analysis of
the two organizations, their balance sheet and income statements have been analysed.

3. Objectives
The present assignment paper has the motive of measuring the financial performances of the IT
giants, Infosys and TCS for the period of April 2017 to March 2019 using the comparative
financial Ratio Analysis. The researcher has acquired the audited financial statements of both the
firms for the three years from the CMIE’s Prowess database and the websites of the companies.
The financial information required for the Ratio Analysis has been obtained from the financial
statements. Later on, this was summarized for the Ratio Analysis grouped into five different
parts- profitability, liquidity, solvency, market based, and leverage ratios.
The study focuses on the following objectives:
  Analyse the financial potential, and the efficiency of the organizations.
 Realize the financial position, and profitability soundness of the firms.
 The usefulness of business management tools in the planning, anticipating and
identifying the weakness in the firms.
 Comparison between the financial performances of TCS and Infosys.

4. Data and Methodology

The researcher has obtained the audited financial statement in order to come to a conclusion, and
hence it is a quantitative approach. The data collected in the paper are via the secondary source.
They have been obtained from the companies’ (Infosys and TCS) annual financial reports,
company websites, and research papers.

The data analysis has been implemented through the Ratio Analysis tools, including:
 Liquidity ratio
 Current ratio
 Quick ratio
 Profitability ratio
 Gross profit ratio
 Efficiency ratio
 Net profit ratio
 Assets turnover ratio
 Debtor turnover ratio
 Mean and standard deviation

Before evaluating the financial performances of both the companies and bringing a comparison
between the both, a look at the income statement and the balance sheets of TCS and Infosys.
Income statement of TCS and Infosys

TCS Infosys
Sales 50,00,000 58,00,000
Less: Cost of sales 42,00,000 47,54,000
Gross Profit 18,00,000 20,66,000
Less: Operating exp. 12,60,000 13,00,000
(Administrative and selling
exp.)
Operating Income (A) 15,50,000 17,66,000
Less: other exp.: 1. 12,30,00 1. 12,86,000
1. Depreciation on 2. 85,700 2. 1,10,000
machinery 3. 14,000 3. 14,000
2. Interest on
debentures
3. Preliminary Exp.
Written off

Total Other Expenditure (B) 12,99,700 13,80,000

Net income before tax (A-B) 12,60,500 13,96,000
Less: provision for tax 46,000 66,000
Net Income After Tax 12,24,400 13,30,300

The Balance Sheets for TCS and Infosys

 LIABILITIES TCS Infosys ASSETS TCS Infosys
Equity share capital of 25,00,000 29,30,000 Fixed assets: 1. 15,00,00 1. 16,00,000
Rs. 10 each 1. Land 0 2. 28,60,000
2. Machi 2. 29,26,00
nery 0
Reserves and Surplus 18,00,000 20,00,000 Investments 10,00,000 13,00,000
Secured loans 18,50,000 20,00,000 Current Assets: 1. 17,30,00 1. 21,00,000
1. Stock 0 2. 22,00,000
2. Deben 2. 18,00,00 3. 11,00,000
tures 0
3. Cash 3. 90,000
and
Bank
Loans and
Advances:

Unsecured loans Miscell. 34,000 30,000

Expenditure-
preliminary
expenditure
Current liabilities and 1. 10,7 1. 20,74,
provisions: 4,00 000
1. Current 0 2. 66,000
liabilities 2. 46,0
creditors 00
2. Income tax
provisions
72,70,000 90,70,000 90,80,000 11,163,000

There is no doubt that the financial performance is the backbone of both TCS and Infosys
helping operate every function. The financial performance depends on the profitability, liquidity,
and the efficiency of the organization, via the use of Ratio Analysis, and Standard Deviation.

Profitability Analysis

GP 2017 2018 2019 Average SD CV

 Ratio
TCS 27.9 27.64 26.92 27.51 1.726228 6.366087

Infosys 29.5 29.03 25.85 28.12667 2.064467 7.679166

NP 2017 2018 2019 Average SD CV
Ratio
TCS 24.29 21.29 22.09 22.55667 1.263715 5.638565
Infosys 24.85 24.69 23.36 24.3 1.296626 5.524612

From the above table, we find the following:

 The Gross Profit (GP) ratio of Infosys is 26.884, and 27.116 is of TCS
 The gross profit in 2017 and 2018 for Infosys are higher than the average GP ratio, but
below than the 2019 GP ratios.
 For the year 2019, the GP ratio of TCS is higher than the average Gross Profit ratio, but
lower than in the years 2017, and 2018.
 The average Net Proft (NP) of TCS is 22.55667, and that of Infosys is 24.3.
 For 2018, the Net Profit for TCS is below the years 2017, and 2019, and below the
average NP ratio.
 The Net Profit of Infosys for 2019 is below the years 2017, and 2018, but above the
average NP ratio.
From the above analysis, it be inferred that the Profitability Ratio of Infosys is better when
compared to TCS. This is because Infosys has the potential to branch out the risks through the
diversifications and elaboration.

Liquidity and Solvency Analysis

Current 2017 2018 2019 Average SD CV

Ratio
TCS 2.9 2.69 3 2.84 0.147377 5.189377
 Infosys 4.82 4.53 4.31 4.096 0.584691 14.27469
Quick 2017 2018 2019 Average SD CV
Ratio
TCS 2.88 2.66 3.01 2.834 0.15641 5.519044
Infosys 4.76 4.49 4.25 4.046 0.580434 14.34588

From the above table, it is displayed that the average Current ratio of TCS is 2.84, and of Infosys
is 4.096. The current ratio of TCS in the year 2017 and 2019 are above than the average, but
2018 is below. On the other hand, the current ratio of Infosys in the years 2017, 2018, and 2019
are above than that of average current ratio. From the results it can be seen that as compared to
the first few years, TCS has shown better performance in the later years. In case of Infosys, its
performance is better in the beginning years as compared to the later years.

Furthermore, the average quick ratio of TCS and Infosys are 2.834 and 4.046 respectively. The
quick ratio of TCS for the years 2014, 2015, and 2016 are above the average, and below in the
years 2017, and 2018. On the other hand, the quick ratio of Infosys for the year 2014, 2015, and
2016 are above average, and below in the years 2017, and 2018. The table shows clearly, that the
liquidity of TCS is mixed with an increase in the years 2014, 2016, and 2017, but decrease in
2015, and 2018. The liquidity of Infosys is better in the beginning years as compared to the later
years. From the liquidity analysis, it is clear that Infosys has a better solvency position than TCS.
It is because there is higher liquidity shown in Infosys than TCS.

Efficiency Analysis

DTR 2017 2018 2019 Average SD CV

TCS 4.85 4.19 4.52 4.704 0.311294 6.617646
Infosys 6.75 6.4 6.22 6.354 0.284366 4.475385
ATR 2017 2018 2019 Average SD CV
TCS 1.7 1.77 1.8 1.788 0.051147 2.860562
Infosys 1.12 1.18 1.16 1.158 0.034871 3.011329

The average DTR (Debtors Turnover Ratio) of TCS is 4.704, and 6.354 of Infosys. The DTR of
TCS in the year 2017 is above the average, and below in the years 2018, and 2019. The DTR for
Infosys in the year 2017 is above the average, but below in the year 2019. In the beginning
years, it is found clearly that Infosys is performing better than the later years. From the above
table, it is interpreted that Infosys is having better potential of converting into sales/cash as
compared to TCS.

Benefits of financial ratio analysis

The ratio analysis is a recognized method of evaluating the performances of companies. The
benefits of ratio analysis (Lermack, 2003) include:

 Examine the performances of the companies and also set a standard

 Focus on the areas that the companies need to focus, especially related to the areas that
offer promising future prospect
 The third party analysis of profitability of the companies

Limitations of financial ratio analysis

The concept of ratio analysis is quite widespread, but there are certain limitations:

 There is often an excess of subjectivity included

 The ratio included might not be precise, because of varying accounting practices, and
different financial year practiced among the companies.
 The ratios used reflect the past performances, and cannot indicate the future performance.
 There is an estimation of the costs highlighted, and not the values.
 The financial statement might not include all the elements
 The accounting standards and practices vary across different companies and countries

Balanced Scorecard Analysis

In order to evaluate the performances of the companies, the financial accounting measures have
been used. Today, the evaluation of the overall performance of the companies incorporates the
non-financial aspects as well applied by the Balanced Scorecard analysis.

Four key areas that both TCS and Infosys strategically organize to create a balanced scorecard.
The following diagram can clearly represent the four key areas of a balanced scorecard.
Customer Aspect Learning and Growth

Company strategic
goals

Financial Aspect Internal Operations

The successful operation of a company depends on its financial performance, which is directly
associated with the internal operations of the company, how the customer perceives it and
connects to the company, and the path in which the company moves forward. The use of the
balanced scorecard analysis allows the company/organization to seek a stakeholder perspective.

Financial aspect

There are certain financial metrics that help in evaluating the performances of companies.
Metrics like revenue growth, sales growth, earnings per share, product cost, ROI, RI, EVA, etc.,
are taken into account to evaluate the performances of the companies.

Internal Operations

It is vital for the companies to examine or assess the internal business operations in order to
check out whether they are catering to the strategic goals of the companies. This aspect focuses
on the quality manufacturing, the management system development, the production change of a
product for another product, the use of IT, corporation between the various departments.

Customer aspect

This area of the balanced scorecard focuses on the satisfaction of the customers via offering new
services and production, responding to the complaints, and improving the service or the product.
TCS and Infosys, both track their customer complaints and requests because they both don’t
want to lose their customers.

Leaning and growth

The focus of this aspect is the company’s potential to create new products/services and come up
with modern management policies. Without continuous learning and innovation, no company
can grow as the competitors will grow and evolve.

The balanced scorecard is used in order to examine the overall performance for the companies by
setting standards for each of the aspects that measures the strategic goals and motives of
companies as presented in the image below.

Benefits of Balanced Scorecard

There are three primary benefits:

 The analysis focuses on the company as one unit

 There is an amalgamation of the various aspects of the company like quality, customer
service etc.
  It sets out standards for the lower levels of the company.

Limitations of Balanced Scorecard

One of the prime criticism of the balanced scorecard is that the analysis focuses mainly on the
internal aspects of the companies. It doesn’t examine the changes taking place in the external
environment. For example, the analysis fails to offer any evaluation of the movement of the
competitors. It is very important that the management of the company must assess the external
factors as well to smoothly operate the company.

Conclusion

The motive behind the study is to bring a comparison in the effectiveness of the ratio analysis
and the balanced scorecard methods in examining the overall performances of the companies
(TCS and Infosys). The questions are:

 Is the ratio analysis enough to evaluate the performances of TCS and Infosys?
 Ration analysis or Balanced Scorecard-which method is more efficient?

Both the methods are used to assess the overall performances of the companies. But, the
Balanced Scorecard seems to provide a bigger picture as to whether TCS and Infosys are
catering to their objectives. Furthermore, the ratio analysis measures the short term performances
because it focuses only on the financial aspect. On the other hand, the balanced scorecard
measures both the short term and the long term goals as the financial and the non-financial
measures are taken into account.

The balanced scorecard and the ratio analysis are performance measuring tools for companies.
One of the motives behind the study is to recognize the better method for evaluating the
performances of the companies. The benefits and limitations of both the ratio analysis and the
balanced scorecard methods are taken into account. It is clear that the balanced scorecard is a
better method for evaluating the overall performances of the companies since it offer a better
comprehensive analysis of the total performances of the companies. But we cannot forget that
the ratio analysis is also an essential tool for assessing the performances of companies, especially
when you need to compare the financial aspect between multiple organizations. Hence, either of
the two methods cannot be ignored.

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