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A comparative study of financial performance analysis of selected Indian it

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A Comparative Analysis of the Financial
Performances of Selected Indian
IT Companies During 2010-2014
Rohit Bansal*

IT sector plays a vital role in strengthening the Indian economy. In order to compare and
set benchmark, a financial statement analysis should be made of all companies. The
objective of the present paper is to measure the financial and accounting performances
of leading Indian IT companies for the period 2010-2014. Financial statements and
income statements of Tata Consultancy Services (TCS), Wipro, Infosys and Tech Mahindra
were taken from databases like CMIE Prowess, Money Control and Yahoo Finance. The
information derived from these financial statements were summarized and used to
compute financial ratios for the five-year period. A graphical representation is provided
in order to compare the financial ratios of one industry against the others for the same
period. Based on factors like current ratio, return on shareholder’s equity, earnings per
share, debtor turnover ratio and most importantly debt equity ratio, it is concluded that
Infosys is the most sought-after company for investors. Along similar lines is TCS whose
working capital turnover, total asset turnover and DuPont analysis returns show
encouraging signs for shareholders who have profits as their prime point of consideration.

Introduction
The Information Technology (IT) sector has been playing a vital role in strengthening the
Indian economy. Its contribution was 7.2% to India’s GDP in 2012. In order to compare and
set benchmark, a financial statement analysis should be made of all companies. A financial
statement is a collection of data organized according to logical and consistent accounting
procedures. Its purpose is to convey an understanding of some financial aspects of a business
firm. Financial analysis (also referred to as financial statement analysis or accounting analysis)
refers to an assessment of the viability, stability and profitability of a business, sub-business
or project. The present paper attempts to measure the financial and accounting performances
of leading Indian IT companies for the period 2010-2014. The paper is structured as follows:
it presents a brief review of the literature dealing with the accounting and financial
performance of the IT sector, followed by a description of the objectives, data and
methodology. Subsequently, it discusses the results, and finally, offers the conclusion.

* Assistant Professor (Accounting and Finance), Department of Management Studies, Rajiv Gandhi Institute
of Petroleum Technology, Institute of National Importance (An Act of Parliament), 2nd Floor, Tower C, OIDB
Bhawan, Plot No. 2, Sector-73, Noida 201301, Uttar Pradesh, India. E-mail: rohitbansaliitr@gmail.com

2015 IUP. All

A©Comparative Rights of
Analysis Reserved.
the Financial Performances 43
of Selected Indian IT Companies During 2010-2014
Literature Review
Beginning with Beaver (1966) who contended that standard financial ratios can predict the
financial performance of firms, many subsequent studies have attempted to demonstrate the
predictive value of various techniques for estimating actual business performance. Many
research projects were undertaken in an attempt to validate the use of financial ratios for
predicting the financial performance of a firm. Some of the better known studies include
Altman and Narayanan (1977), Norton and Smith (1979), and Mensah (1983). These studies,
like their predecessors, fail to demonstrate that normality of distribution or those necessary
sample assumptions have been met prior to the analysis.
Some other notable studies in this area are Boardman and Vining (1989), Commander
et al. (1996) and La Porta et al. (1997). In the historical approach, ex ante and ex post
privatization performance of the same enterprise is compared. Notable studies that followed
this approach include Megginson et al. (1994), Earle and Estrin (1997), and Dewenter and
Malatesta (1998). This was not the case in countries like Mexico, Chile and Mozambique
where a few years after privatization, the institutions were experiencing financial problems
which quickly got transformed into a systemic crisis (Dammert and Lasagabaster, 2002).
Foster (1986) reviewed the literature describing the methods and theories for evaluating
and predicting the financial performance and revealed that although methods have become
increasingly complex, few researchers have adequately addressed the problems associated
with the sample used. For example, most ratio analysis studies use multivariate analysis that
is based on the assumption of a normal distribution of the financial ratios. Without confirming
the approximation of normality of ratio distribution, the researchers are at a risk of drawing
erroneous inferences. When considering the distribution of financial ratios in any database,
the normality of the distribution can be skewed by data recording errors, negative denominators
and denominators approaching zero. Further, McLeod and Malhorta (1994) argued that the
only way to assess future financial performance is through the inclusion of subjective measures.
Lasher (2005) debt ratios show how effectively the organization uses other people’s
money and whether it is using a lot of borrowed money. Ross et al. (2007) expressed the
concern that most researchers divide financial ratios into four groups, i.e., profitability,
solvency, liquidity and activity ratios. Lermack (2003) showed the benefits of financial
ratios analysis. He showed that financial ratios are an important and well-established technique
of financial analysis. As for the benefits of financial ratios analysis, Brigham and Ehrhardt
(2010) stated that financial ratios are designed to help evaluate financial statements. Financial
ratios are used as a planning and control tool, and financial ratios analysis is used to evaluate
the performance of an organization.
Tiwari and Parray (2012) explained in detail the analysis of financial statements of Ranbaxy
Ltd. They provided insights into two widely used financial tools, ratio analysis and common
size statements analysis. The objective of the paper was to help the reader understand how
these tools should be used to analyze the financial position of a firm. To demonstrate the
process of financial analysis, Ranbaxy Ltd.’s balance sheet and income statements were analyzed.

44 The IUP Journal of Accounting Research & Audit Practices, Vol. XIV, No. 4, 2015
Objectives
The present research paper aims to measure the financial performances of Indian IT companies
like TCS, Wipro, Infosys and Tech Mahindra for the period April 2010-March 2014 using
comparative financial ratios. As a research procedure, the researcher obtained the audited
financial statements of Indian IT companies for the five-year period (2010-2014) from CMIE’s
Prowess database and company website. The financial information necessary for financial
ratios was derived from these financial statements. The information was then summarized
and processed to come up with comparative financial ratios that were used in the analysis.
In this study, financial ratios were grouped into five categories, i.e., liquidity, profitability,
solvency, market-based, and leverage ratios. The study seeks to answer the research question
– What are the norms, industry figures, and peculiarities in the IT sector of the Indian
market? – using liquidity, activity, leverage, profitability, and market value ratios.
Thus, the study specifically aims to meet the following objectives:
1. The financial ratio analysis to judge the earning capacity, financial soundness and
operating efficiency of a business organization.
2. The use of ratio in accounting and financial management analysis helping the
management to know the profitability, financial position and operating efficiency
of an enterprise.
3. Its usefulness in business planning, forecasting and locating the weak spots in the
business even though the overall performance may be quite good.
4. Its usefulness as a measure of inter-firm and intra-firm comparison.

Data and Methodology

Selected IT Companies
Tata Consultancy Services (TCS): TCS is a multinational information company founded in
1968 and is a subsidiary of Tata conglomerate. It is listed in both Bombay Stock Exchange
(BSE) and National Stock Exchange (NSE) of India. It is the leader in global marketplace and
is among the top 10 technology firms in the world. It was also first in the race among India-
based IT companies in 2013, and currently is ranked at the tenth position among world’s
largest IT companies in terms of revenue. TCS is the largest Indian company in terms of
market capitalization. It is headquartered in Maharashtra, India. TCS is dealing with various
kind of products and services, such as assurance services, BI and performance management,
business process services, consulting, digital enterprise, eco-sustainability services,
engineering and industrial services, enterprise security and risk management, enterprise
solutions, iON small and medium business, IT infrastructure services, IT services, platform
solutions, and supply chain management.
Wipro: Wipro Limited (formerly known as Western India Products Limited) is a multinational
IT consulting company founded in 1945. It is India’s largest publicly traded company and
holds the seventh position among world’s largest IT services firms. The company is equipped

A Comparative Analysis of the Financial Performances 45

of Selected Indian IT Companies During 2010-2014
with 147,452 employees to serve clients in more than 175 cities across six continents. With
Wipro Consumer Care and Lighting (WCCLG), it has also ventured into FMCG market and
is rapidly increasing its presence in the market. Wipro Infrastructure Engineering (WIN) is
the largest independent hydraulic cylinder manufacturer in the world. It is headquartered
are in Karnataka, India. Wipro is dealing with various kind of products and services such as
analytics applications, business process, cloud, consulting, digital, eco-energy, information
management, infrastructure services, Internet of things, managed services, mobility, open
source, and product engineering.
Infosys: Infosys (formerly known as Infosys Technologies Private Limited) is an Indian
multinational corporation founded in 1981. It was the third largest Indian IT services company
in terms of revenue in 2014, and India’s fifth largest publicly traded company. Infosys has
global presence with more than 160,000 employees and generated revenue of $8.25 bn in
the FY14. It is headquartered in Karnataka, India. Infosys is dealing with various kind of
services such as Aikido: Next-Generation Services, Ki: Knowledge-based management and
evolution of landscapes, Do: Design thinking and design-led initiatives, Ai: Platforms and
platform as a service, business services, business applications, business intelligence, Digital
Infosys Consulting, Oracle, SAP, technology services, application management, cloud,
infrastructure and security engineering services, enterprise mobility, testing, outsourcing
services, application outsourcing, business process outsourcing, customer service, finance
and accounting, human resources, and sourcing and procurement. It is also dealing with
several product categories such as banking suite, big data, cloud, customer service, digital
commerce, digital marketing, distributive trade, micro-commerce, sourcing and procurement,
Edge-Verve, Assist-Edge – customer service experience, Brand-Edge – digital marketing,
Credit Finance Edge – micro-commerce, Interact Edge – digital commerce, Procure Edge –
sourcing and procurement, Trade Edge – distributive trade, Infosys Finacle, core banking,
CRM, digital commerce, direct banking, e-Banking consumer, e-Banking corporate inclusion,
Islamic banking, mobile banking, payments, treasury, and wealth management.
Tech Mahindra: Tech Mahindra Limited is an Indian multinational information technology
company and a part of the Mahindra Group conglomerate. It was ranked fifth among India’s
software services firms and 111th in Fortune India 500 list, 2012. It is equipped with 92,729
employees across 51 countries. It is headquartered in Maharashtra, India. They are dealing
with various products and services like IT, business consulting, business process outsourcing,
application development and management, and network services.

Key Financial Ratios

The five categories of ratios used in financial statement analysis are:
1. Liquidity Ratios
• Current Ratio
• Quick Ratio or Acid Test Ratio

46 The IUP Journal of Accounting Research & Audit Practices, Vol. XIV, No. 4, 2015
 2. Profitability Ratios
• Profit Margin
• Net Profit Margin
• Return on Shareholder’s Equity (RONW)
• Return on Assets (ROA)
3. Market-Based Ratios
• Earnings per Share (EPS)
• Price Earnings (PE) Ratio
4. Solvency Ratios
• Inventory Turnover Ratio
• Debtor Turnover Ratio
• Working Capital Turnover
• Total Asset Turnover
5. Leverage Ratios
• Debt to Equity
• Interest Coverage Ratio
Method
A method of performance measurement—Dupont Analysis—was started by the DuPont
Corporation in the 1920s. With this method, assets are measured at their gross book value
rather than at net book value in order to produce a higher Return on Equity (ROE). The
higher the result, the higher is the return on the equity. The DuPont analysis is important
as it determines what is driving a company’s ROE. Profit margin shows the operating
efficiency, asset turnover shows the asset use efficiency, and leverage factor shows how
much leverage is being used. DuPont analysis allows analysts to dissect a company by
efficiently determining where the company is weak and strong and to quickly know what
areas of the business to be concentrated upon (i.e. inventory management, debt structure,
margins) for more answers.
The DuPont system helps the analyst to see how the firm’s decisions and activities over
the course of an accounting period interact to produce an overall return to firm’s shareholders,
the ROE (Frase and Ormiston, 2004). Moreover, according to Brigham and Houston (2009),
it is a formula that shows that the rate of return on equity can be found as the product of
profit margin, total assets turnover, and the equity multiplier. It shows the relationships
among activity, leverage and profitability ratios. It is calculated as:
DuPont analysis = Profit after tax/Total assets

A Comparative Analysis of the Financial Performances 47

of Selected Indian IT Companies During 2010-2014
Results and Discussion
Descriptive Statistics
Tables 1 to 4 show the values of several financial ratios of Infosys, Tech Mahindra, Wipro and
TCS from 2010 to 2014. All tables show liquidity ratios, i.e., current ratio and acid test ratio;
profitability ratios, i.e., return on assets, return on shareholder’s equity (RONW), earnings per
share, price earnings ratio, net profit margin, and profit margin; activity ratios, i.e., inventory
turnover ratio, debtor turnover ratio, and working capital turnover; assets turnover ratios, i.e.,
fixed assets and total assets turnover; and leverage ratios, i.e., debt to equity, interest coverage
ratio, shareholder’s equity ratio, and return on total asset. Finally, DuPont analysis is employed
to measure the financial performance of the company.

Table 1: Financial Ratios of Infosys

Ratio Mar ‘14 Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10
Current Ratio 5.691 6.620 7.618 1.903 1.795
Acid-test Ratio 1.386 1.622 1.693 1.631 1.357
Return on Assets 47.860 49.634 53.185 52.626 54.371
Return on Shareholder’s Equity 3725.87 3296.85 2913.2 2389.86 2190.90
Earnings per Share 185.56 164.20 145.09 119.04 109.19
Price Earnings Ratio 0.000 18.681 17.206 23.027 27.012
Net Profit Margin 0.213 0.234 0.247 0.249 0.276
Profit Margin 0.213 0.234 0.247 0.249 0.276
Inventory Turnover Ratio 0.000 0.000 0.000 0.000 0.000
Debtor Turnover Ratio 6.003 5.697 5.735 5.910 6.509
Working Capital Turnover 1.298 1.314 1.184 4.784 4.987
Total Asset Turnover 1.126 1.062 1.077 1.059 0.987
Debt to Equity Ratio 0.000 0.000 0.000 0.000 0.000
Interest Coverage Ratio 0.000 0.000 3157.7 5090.50 4427.0
Dupont Analyis (Return on Total Assets) 0.239 0.248 0.266 0.263 0.272
Dupont Analyis (Return on Sales) 0.213 0.234 0.247 0.249 0.276

Insights
Now, the results pertaining to specific ratios for each category are presented and discussed,
followed by the discussion of the DuPont equation derived.

Liquidity Ratios
Current Ratio: This ratio shows the current assets available to cover current liabilities at the
balance sheet date. There should be a reasonable buffer of current assets over current liabilities
as an indication of the ability of the firm to pay its debts as and when they fall due. For the

48 The IUP Journal of Accounting Research & Audit Practices, Vol. XIV, No. 4, 2015
year 2010 and 2011, the current ratio for Infosys was 1.7 and 1.9 respectively. But in the
subsequent years, i.e., 2012, 2013 and 2014, it increased drastically to 7.61, 6.61 and 5.69
respectively, much higher than that of the other selected companies (Figure 1). So it can be
inferred that Infosys has greater resources to pay off its current debts.

Figure 1: A Comparative Analysis of Current Ratio of Selected Companies

8
7
Infosys
6
5 Tech Mahindra
Ratio

4
3 Wipro
2
1 TCS
0
March March March March March
2014 2013 2012 2011 2010
Year

Table 2: Financial Ratios of Tech Mahindra

Ratio Mar ‘14 Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10
Current Ratio 2.104 1.219 1.112 2.632 2.122
Acid-test Ratio 1.191 0.923 0.939 2.214 1.768
Return on Assets 57.734 22.45 20.941 16.839 27.931
Return on Shareholder’s Equity 1311.52 579.78 425.176 345.714 574.98
Earnings Per Share 131.167 57.970 42.522 34.584 57.489
Price Earnings Ratio 0.000 24.456 20.141 18.799 12.482
Net Profit Margin 0.163 0.108 0.099 0.085 0.152
Profit Margin 0.163 0.108 0.099 0.085 0.152
Inventory Turnover Ratio 1100.66 773.83 7617.50 3341.0 2061.70
Debtor Turnover Ratio 4.330 4.034 4.168 4.123 4.439
Working Capital Turnover 1.382 2.939 3.321 3.491 4.024
Total Asset Turnover 1.775 1.039 1.060 0.994 0.919
Debt to Equity Ratio 0.224 8.434 8.836 14.337 17.456
Interest Coverage Ratio 55.279 12.439 9.256 5.859 5.155
Dupont Analyis (Return on Total Assets) 0.289 0.112 0.105 0.084 0.140
Dupont Analyis (Return on Sales) 0.163 0.108 0.099 0.085 0.152

Quick Ratio: As a supplement to current ratio, quick or acid test ratio aims to show the more
liquid current assets available to pay the more immediately payable liabilities. With reference
to current assets, the results are not significantly affected since only inventories are not
considered here. Initially in 2010 and 2011, Tech Mahindra’s ratio was higher than those of

A Comparative Analysis of the Financial Performances 49

of Selected Indian IT Companies During 2010-2014
 Table 3: Financial Ratios of Wipro
Ratio Mar ‘14 Mar ‘13 Mar ‘12 Mar ‘11 Mar’10
Current Ratio 1.890 2.504 2.286 1.551 1.224
Acid-test Ratio 0.967 1.331 1.129 1.029 0.799
Return on Assets 43.729 37.822 40.454 39.558 44.197
Return on Shareholder’s Equity 1255.03 1138.27 1072.80 1564.44 1322.04
Earnings Per Share 25.118 22.778 21.467 31.284 26.441
Price Earnings Ratio 0.000 18.426 17.112 18.741 15.429
Net Profit Margin 0.165 0.151 0.170 0.169 0.151
Profit Margin 0.165 0.151 0.170 0.169 0.151
Inventory Turnover Ratio 38.72 28.58 26.94 34.12 38.53
Debtor Turnover Ratio 4.404 4.668 5.369 5.425 5.780
Working Capital Turnover 1.701 1.975 2.223 3.071 2.575
Total Asset Turnover 1.324 1.257 1.192 1.172 1.466
Debt to Equity Ratio 8.214 10.66 9.59 18.83 17.11
Interest Coverage Ratio 31.43 24.137 37.356 51.843 22.69
Dupont Analyis (Return on Total Assets) 0.219 0.189 0.202 0.198 0.221
Dupont Analyis (Return on Sales) 0.165 0.151 0.170 0.169 0.151

Table 4: Financial Ratios of TCS

Ratio Mar ‘14 Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10
Current Ratio 3.202 2.566 3.229 2.978 1.567
Acid-test Ratio 1.786 1.731 2.247 1.992 1.407
Return on Assets 77.085 71.176 69.567 73.424 74.929
Return on Shareholder’s Equity 9869.7 7191.7 5376.7 4695.3 3623.8
Earnings Per Share 98.696 71.917 53.767 46.953 36.238
Price Earnings Ratio 0.000 26.191 24.223 24.00 26.23
Net Profit Margin 0.236 0.223 0.215 0.246 0.236
Profit Margin 0.236 0.223 0.215 0.246 0.236
Inventory Turnover Ratio 1642.4 2012.2 1477.4 1118.7 1045.6
Debtor Turnover Ratio 4.488 4.475 3.551 3.911 5.128
Working Capital Turnover 1.534 1.895 1.529 1.754 2.903
Total Asset Turnover 1.631 1.593 1.616 1.491 1.586
Debt To Equity Ratio 1.299 0.714 0.393 0.234 0.349
Interest Coverage Ratio 695.47 396.33 668.62 444.95 558.26

50 The IUP Journal of Accounting Research & Audit Practices, Vol. XIV, No. 4, 2015
 Table 4 (Cont.)
Ratio Mar ‘14 Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10
Dupont Analysis (Return On Total Assets) 0.385 0.356 0.348 0.367 0.375
Dupont Analysis (Return On Sales) 0.236 0.223 0.215 0.246 0.236

TCS, Wipro and Infosys, but in 2012 and 2013, it was the lowest among all four companies,
and in 2014, it became steady. The ratio of Infosys is a constant curve ranging from 1.3 to
1.6 and again to 1.3. Almost same is the case with Wipro ranging from 0.79 to 1.3 to 0.96,
but lower than that of Infosys and TCS. However, TCS shows a better ratio than every other
company ranging from 1.4 to 2.2 (Figure 2). So, it can be inferred that TCS has the ability to
pay off its liabilities without selling its inventories in comparison to other companies.

Figure 2: A Comparative Analysis of Acid Test Ratio/Quick Ratio

of Selected Comapnies

2.5
Infosys
2.0
Tech Mahindra
1.5
Ratio

1.0 Wipro

0.5 TCS
0
March March March March March
2014 2013 2012 2011 2010

Year

Activity Ratios
Inventory Turnover Ratio: The ratio shows how many times a company’s inventory is sold
and replaced over a period of time. The days in the period can then be divided by the
inventory turnover formula to calculate the days it takes to sell the inventory on hand or
inventory turnover days. Infosys has not had any inventories in its store for the past five
years. As for Tech Mahindra, turnover ratio increased from 2,061 in 2010 to 3,341 in 2011
and peaked to 7,617.5 in 2012. Then it plunged to 773 in 2013 and rose to 1,100.66 in 2014.
Wipro had kept its turnover ratio steady from 38.5 in 2010 to 38.7 in 2014. TCS has comparatively
soaring turnover ratios ranging from 1,045 in 2010 to 1,642 in 2014, recording the peak value
of 2,012 in 2013 (Figure 3). It can hence be inferred that TCS has managed effectively its
inventories to obtain the highest turnover, but such a high ratio is not normally desirable.
Debtor Turnover Ratio: The debtor turnover ratio helps gauge the liquidity of accounts
receivable, the ability of the firm to collect from customers. It is advisable to have a lower
debtor turnover ratio. As observed from the graph, Infosys debtor turnover ratio is the highest

A Comparative Analysis of the Financial Performances 51

of Selected Indian IT Companies During 2010-2014
 Figure 3: A Comparative Analysis of Inventory Turnover Ratio
of Selected Companies

8,000
7,000 Infosys
6,000 Tech Mahindra
5,000
Ratio

4,000 Wipro
3,000
2,000 TCS
1,000
0
March March March March March
2014 2013 2012 2011 2010
Year

among all companies ranging from 6.2 to 6.5, whereas all other companies’ ratios declined
from 2010 to 2014. Starting from Wipro 5.7, TCS 5.2 and Mahindra 4.4 – all came down to
4.2 in 2014 (Figure 4). So, Infosys has been using its assets very efficiently in extending its
credit as well as collecting debts.

Figure 4: A Comparative Analysis of Debtor Turover Ratio of Selected Companies

7
6 Infosys
5
4 Tech Mahindra
Ratio

3
2 Wipro
1 TCS
0
March March March March March
2014 2013 2012 2011 2010
Year

Working Capital Ratio: Working capital ratio has been used to find out the running of day-
to-day financial activities. Positive working capital is required to ensure that a firm is able to
continue its operations and that it has sufficient funds to satisfy both maturing short-term
debt and upcoming operational expenses. The working capital turnover in the year 2010
was highest for Infosys at 4.98, followed by Tech Mahindra at 4.02, TCS at 2.9 and Wipro at
2.5. All the companies showed a decline in the ratio in the next year, except Wipro increasing
to 3 from 2.5. The capital turnover ratio went down for all companies till 2014 and settled
around 1-2 (Figure 5). So, it can be concluded that all companies had a better capital turnover,
but gradually it declined and settled at the same point.

52 The IUP Journal of Accounting Research & Audit Practices, Vol. XIV, No. 4, 2015
 Figure 5: A Comparative Analysis of Working Capital Turnover
of Selected Companies

6
5 Infosys
4
Tech Mahindra
Ratio

3
2 Wipro
1 TCS
0
March March March March March
2014 2013 2012 2011 2010
Year

Assets Turnover Ratio

Total Assets Turnover: Generally, the higher this ratio, the more effective it is. In other
words, this ratio indicates the effectiveness of using total assets to generate revenues. Similar
to the previous financial ratio, as a rule of thumb, to be considered effective, it should be at
least 0.30 times. In the year 2010, TCS had the highest asset turnover of 1.5, followed by
Wipro at 1.4, Infosys at 0.98 and last Mahindra at 0.91. The growth was linear for all companies
till 2013, after which Tech Mahindra’s turnover was highest at 1.7 in 2014, followed by
TCS, Wipro and Infosys (Figure 6). Thus, it can be concluded that over the last five years,
TCS has been able to regenerate assets to generate sale consistently.

Figure 6: A Comparative Analysis of Total Assets Turnover of Selected Companies

2
1.8 Infosys
1.6
1.4 Tech Mahindra
Ratio

1.2
1 Wipro
0.8
0.6 TCS
0.4
0.2
0
March March March March March
2014 2013 2012 2011 2010
Year

Leverage Ratios
Debt to Equity Ratio: This ratio shows the dependence on debt (borrowed) finance as compared
to equity funding. The greater is the reliance on debt financing, the greater is the level of
interest and the greater the risk from exposure to rising interest rates. Firms listed on stock
exchange tend to follow a pattern of raising additional finance through borrowing for a

A Comparative Analysis of the Financial Performances 53

of Selected Indian IT Companies During 2010-2014
number of years and then raise equity by issuing new shares. Infosys debt is zero in all the
years so its debt/equity ratio is 0.00. Tech Mahindra had a high debt to equity ratio of 17.45
in 2010, which slimmed down to 0.22 in 2014. Similarly, Wipro too had a high ratio ranging
from 17.11 in 2010 to 8.21 in 2014 (Figure 7). TCS, however, managed to keep its ratio
within the limits, and as a result, it enjoys lesser financial risk. Hence, it can be inferred that
Infosys is the best investment option among the four owing to its null debt record.

Figure 7: A Comparative Analysis of Debt to Equity of Selected Companies

20
18
16 Infosys
14
12 Tech Mahindra
Ratio

10
Wipro
8
6 TCS
4
2
0
March March March March March
2014 2013 2012 2011 2010
Year

Interest Coverage Ratio: The interest coverage ratio is a measure of the number of times a
company could make the interest payments on its debt with its EBIT. A higher ratio indicates
a better financial health as it means that the company is more capable to meeting its interest
obligations from operating earnings. However, if a firm is generating high profits, but there
is no cash flow from operations, this ratio is misleading. Infosys did not have any interest
expenses in 2013 and 2014 but had a high expense of 3,157.75 in 2011. Tech Mahindra
recorded its best interest coverage ratio of 55.279 in 2014, while the other values ranged
from 5.15 in 2010 to 12.4 in 2013. Wipro had a high ratio (51.84) in 2011 and had the
lowest figures (24.13) in 2013 (Figure 8). TCS showed huge figures varying between 396.3
in 2013 and 695.4 in 2014, while for the other years also elevated figures were recorded.

Figure 8: A Comparative Analysis of Interest Coverage Ratio of Selected Companies

6,000 Infosys
5,000
4,000 Tech Mahindra
Ratio

3,000 Wipro
2,000
TCS
1,000
0
March March March March March
2014 2013 2012 2011 2010
Year

54 The IUP Journal of Accounting Research & Audit Practices, Vol. XIV, No. 4, 2015
Profitability Ratio
Return on Assets: Generally, the higher this ratio, the more effective it is. This ratio indicates
the effectiveness of using assets to generate revenues. Similar to the previous financial ratio,
as a rule of thumb, to be considered effective, it should be at least 0.30 times. The return on
asset of TCS is highest among all ranging from 74% to 77%, whereas that of Tech Mahindra is
lowest ranging from 57% to 27%. Infosys and Wipro are parallel with their return on asset
ranging around 47 to 54 and 43 to 44 respectively (Figure 9). Hence, it can be inferred that
TCS has been able to use its assets efficiently to generate good profit in the last five years.

Figure 9: A Comparative Analysis of Return on Assets of Selected Companies

80
Infosys

60 Tech Mahindra
Ratio

40 Wipro

TCS
20

0
March March March March March
2014 2013 2012 2011 2010
Year

Return on Shareholder Equity: The return on equity ratio is a profitability ratio that measures
the ability of a firm to generate profits from its shareholders’ investments in the company. The
return on shareholder’s equity was commendable in 2014 for Infosys, which has always managed
to record encouraging figures from 2,190.9 in 2010. 2014 was a great year for Tech Mahindra’s
shareholders since the returns rose to 1,311.5 from 579.7 in 2013. Wipro registered 1,322 in
2010 to 1,255 in 2014 (Figure 10). TCS recorded a return in 2014 that was almost three times
its figure in 2010. Overall, TCS provided greatest return in equity to its shareholders.

Figure 10: A Comparative Analysis of Return on Shareholder’s Equity

of Selected Companies
10,000

8,000
Infosys
Ratio

6,000
Tech Mahindra
4,000
Wipro
2,000
TCS
0
March March March March March
2014 2013 2012 2011 2010
Year

A Comparative Analysis of the Financial Performances 55

of Selected Indian IT Companies During 2010-2014
Earnings Per Share: This ratio indicates the ability of the firm’s assets to generate operating
income. As a rule of thumb, the higher this ratio, the better it is. It is important to realize
that this ratio shows the return that shareholders are actually obtaining on their investment,
using current market value for listed shares. In 2014, Infosys recorded its best EPS of 185.56
over the past five years. Its EPS increased from 109 in 2010 to 164 in 2013. Tech Mahindra
also showed progressive EPS of 131 in 2014, which increased from its value of 34.58 in
2011. Wipro showed a steady earnings per share from 26.44 in 2010 to 25.11 in 2014
(Figure 11). TCS recorded its best EPS of 98.69 in 2014 over the past five years. The
shareholders can be assured that Infosys and TCS can be considered safe players in terms of
investment.

Figure 11: A Comparative Analysis of Earnings Per Share

of Selected Companies

200 Infosys
150 Tech Mahindra
Ratio

100 Wipro
50
TCS
0
March March March March March
2014 2013 2012 2011 2010
Year

Net Profit Margin: Net profit margin is the percentage of revenue left after all expenses
have been deducted from sales. The net profit margin is intended to be a measure of the
overall success of a business. A high net profit margin indicates that a business is pricing
its products correctly and is exercising good cost control. As a rule of thumb, a higher
operating margin is preferred since lower profit margin as compared to similar firms may
mean higher accounting costs. The net profit margin in the year 2010 was highest for
Infosys at 0.27, followed by TCS at 0.23 and Tech Mahindra and Wipro settling at around
0.15. The growth was almost linear for all companies in the next year, except Tech
Mahindra whose ratio declined to 0.08 and thereafter showed a steady growth settling at
0.16 in 2014. The net profit margin of Infosys was declining constantly, whereas Mahindra’s
rate was going up (Figure 12). However, the highest profit margin company was TCS at
0.23. Thus, it can be concluded that TCS and Infosys have a better chance to invest in
expansion plans.
Price Earnings Ratio: The price earnings ratio for Tech Mahindra showed an increasing trend
from 12 to 24 over the period 2010 to 2013, whereas Wipro showed a fluctuating trend,
with values ranging from 15 to 18. On the other hand, price earnings ratio of Infosys constantly
declined from 27 to 18, while that of TCS was the highest ranging from 26.23 in 2010 to

56 The IUP Journal of Accounting Research & Audit Practices, Vol. XIV, No. 4, 2015
 Figure 12: A Comparative Analysis of Net Profit Margin of Selected Companies

0.30
0.25 Infosys
0.20 Tech Mahindra
Ratio

0.15
Wipro
0.10
TCS
0.05
0
March March March March March
2014 2013 2012 2011 2010
Year

Figure 13: A Comparative Analysis of Price Earnings Ratio of Selected Companies

30
25
Infosys
20
Ratio

Tech Mahindra
15
Wipro
10
5 TCS

0
March March March March March
2014 2013 2012 2011 2010

Year

26.19 in 2013 (Figure 13). Thus, it can be concluded that TCS had the best price earnings ratio
during the four years.

DuPont Analysis
Having considered individual financial ratios as well as groups of financial ratios measuring
short-term liquidity, operating efficiency, capital structure, long-term solvency, and
profitability, it is helpful to complete the evaluation of a firm by considering the
interrelationship among the individual ratios. The return on sales in the year 2010 was
highest for Infosys at 0.27, followed by TCS at 0.23 and both tech and Wipro at 0.15.
Infosys’ return on sales was always decreasing, followed by a zigzag motion by TCS settling
at the highest spot at 0.23 (Figure 14). Tech Mahindra showed a decline in return on sales in
the year 2011 to 0.08, and thereafter it steadily increased, settling at 0.16 with Wipro in
2014. Thus, generally, it can be inferred that Infosys had managed to achieve the maximum
profit in terms of its net sales.

A Comparative Analysis of the Financial Performances 57

of Selected Indian IT Companies During 2010-2014
 Figure 14: A Comparative Analysis of DuPont Analysis (Sales)
of Selected Companies

0.30
Infosys
0.25
0.20 Tech Mahindra
Ratio

0.15
Wipro
0.10
0.05 TCS
0
March March March March March
2014 2013 2012 2011 2010

Year

Conclusion
Based on factors like current ratio, return on shareholder’s equity, earnings per share, debtor
turnover ratio and most importantly debt equity ratio, it can be concluded that Infosys is the
most sought-after company for investors. Along similar lines is TCS, whose working capital
turnover, total asset turnover and DuPont analysis returns show encouraging signs for
shareholders who have profits as their prime point of consideration.

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60 The IUP Journal of Accounting Research & Audit Practices, Vol. XIV, No. 4, 2015
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