Financial Statement Analysis Assignment - Group-H2 - Section-2

FINANCIAL RATIO ANALYSIS
IT CONSULTANCY INDUSTRY
INFOSYS LIMITED
Submitted By:
Overview
The objective behind this report is the analysis of the current and past trends of the IT consulting
industry with the valuation of ratios of the Big players in this industry with the industry average
as well as comparison of peer financials.
The Information Technology (IT) has been one of the key driving forces fueling India’s
economic growth. Availability of skilled talent has been a major reason behind India’s
emergence as global outsourcing hub. India has been competitive location globally and that is
what has led to the growth of the industry.
The Financials for Majority of the companies has been extracted from Bloomberg, however
money control and Reuters were also our source of reference for financials.
We have taken Infosys as our lead company and have calculated the industry average as the
Average of Infosys and four major players in the field of It consulting.
In this Report, we will be covering the analysis of the ratio in three parts.
1.Comparison of Infosys with the industry Average.
2.Trend of Infosys over the past few years with the industry Average.
3.Peer Comparison.
4. Analysis of the Common-Sized Balance Sheet and Income Statement of Infosys.
Ratio Analysis
Liquidity Rati os
In simple terms, liquidity is nothing but the ability of the company to cover its short term
liabilities. However, liquidity ratios play a significant role in gauging the financial health of the
company as less liquidity indicates that the company is unable to cover its short term obligations,
but a high liquidity signifies inefficient utilization of funds. The two Liquidity ratios that holds
significance are:
Current Ratio = Current Assets/Current Liabilities
Current Ratio
Company/Year Mar '14 Mar '15 Mar '16 Mar '17 Mar '18 Average
Infosys 4.71 4.15 3.91 3.83 3.55 4.03
Wipro 2.61 2.66 2.30 2.35 2.37 2.46
TCS 3.88 3.33 4.06 5.53 4.56 4.27
Tech Mahindra 1.82 1.77 2.18 2.14 1.98 1.98
HCL 2.44 3.13 3.8 3.02 3.04 3.09
Industry Average 3.09 3.01 3.25 3.38 3.10 3.16
Current Ratio
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Mar '14 Mar '15 Mar '16 Mar '17 Mar '18
Infosys Wipro TCS

Tech Mahindra HCL Industry Average
Quick Ratio = Current Assets-Inventories-Prepaid Expenses/Current Liabilities

Quick ratio
Infosys 3.75 3.52 3.33 3.21 2.79 3.32
Wipro 1.28 1.30 1.84 1.92 1.85 1.64
TCS 3.06 2.74 3.32 4.71 3.79 3.52
Tech Mahindra 1.36 1.21 1.59 1.41 1.42 1.40
HCL 2.4 3.08 3.54 2.82 2.75 2.92
Quick Ratio
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Infosys Wipro TCS

The point of Difference between Current and Quick Ratio is that Quick ratio offers a more
holistic view of the liquidity of the company as it excludes Inventory and prepaid expenses since
inventory may take a long period to be converted to cash and may not signify the immediate debt
paying capability and prepaid expenses because they do not actually offer any real liquidity in
terms of future paying capacity.
Analysis:
The Current ratio for Infosys is quite above the industry average almost double. It indicates that
Infosys is withholding cash and equivalents more than its peers. TCS is the only company who is
more liquid than Infosys. However as can be seen the quick ratio for the current year is almost
equal to the industry average which indicates a huge chunk of current ratio was coming from
prepaid expenses. It is also visible that the current ratio for the company has fallen for the past
years which indicates increased utilization of funds in other ventures of the business.
Taking Quick Ratio as the base it can be seen TCS has the highest liquidity and Tech Mahindra
has the lowest for the current year. However, if past trends are to be seen then the liquidity of
tech Mahindra has actually risen comparatively while the rest of the companies saw a fall in the
Liquidity over the past year with Infosys seeing a fall of around 15%.
Profi tability
Profitability ratios defines the efficiency and productivity of a company from various aspects
such as Assets, Equity, Capital employed, Operating activities etc. It helps a company in figuring
out the key areas whether margin based or return based areas need more aspects.
The ratios that we have used for our analysis are as follows:
2.a Return on Assets-Indicates the ability of the company to utilize its assets to its optimal level
and how well they are able to generate profit. A higher ratio means the company is able to
extract a high return from its asset utilization.
Return on Assets
Infosys 20.59 19.98 19.04 18.09 19.64 19.47
Wipro 16.55 15.70 13.46 11.19 10.31 13.44
TCS 31.58 27.29 29.56 27.04 24.16 27.93
Tech Mahindra 24.31 14.69 14.13 11.58 13.45 15.63
HCL 27.43 25.47 17.75 21.23 22.43 22.86
Return on Asset
Infosys Wipro TCS
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2.b Return on Equity-This ratio is particularly significant for the investors of company as it
gauges the return they will be getting on their investment. Further, potential investors usually use
this ratio to know the expected return and future prospects of the company.
Return on Equity
Infosys 24.39 24.11 23.16 21.96 23.94 23.51
Wipro 24.86 23.03 20.40 17.23 15.96 20.30
TCS 40.73 34.83 37.76 32.99 29.42 35.15
Tech Mahindra 41.47 24.52 22.30 18.13 25.28 26.61
HCL 38 32.7 21.95 26.46 26.7 29.16
Return on Equity
Infosys Wipro TCS
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2.c Operating Margin-Indicates the amount of profit a company makes on each unit of sales
after accounting for operating expenses such as wages, raw materials. Since the organization
core activity is operating, it gives the accountability of operating activities towards profit.
Operating Margin
Infosys 23.56 25.05 25.02 24.68 24.32 24.52
Wipro 19.80 19.55 18.15 16.28 15.20 17.79
TCS 29.10 24.09 26.50 25.71 24.78 26.03
Tech Mahindra 19.44 15.66 13.25 11.00 11.78 14.23
HCL 44.31 39.98 38.22 40.66 42.3 41.09
Operating Margin
Infosys Wipro TCS
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2.d Net Profit Margin- Similar to Operating Margin, Net profit also accounts for expenses and
activities that are not part of the core operation of the business such as taxes, interest charges etc.
There must not be significant difference between Operating Margin and Net Profit Margin as that
would suggest that most of the profit is being eaten by leverages such Interest payments etc.
Net profit Margin
Infosys 21.24 23.12 21.60 20.96 22.73 21.93
Wipro 17.95 18.43 17.38 15.42 14.70 16.78
TCS 23.37 20.76 22.34 22.29 20.98 21.95
Tech Mahindra 16.08 11.62 11.30 9.65 12.35 12.20
HCL 36.27 36.99 35.12 35.57 33.35 35.46
Net Profit Margin

Infosys Wipro TCS
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2.e Return on Capital employed-The efficiency by which the company is utilizing its capital
investment is given by this ratio. This is particularly significant as it considers operating profit
for calculation which indicates the efficiency of asset utilization considering the amount invested
as capital.
Return on Capital Employed
Infosys 24.39 24.11 23.16 21.96 23.94 23.51
Wipro 21.22 19.81 16.77 13.77 12.85 16.88
TCS 40.42 34.66 37.36 32.85 29.31 34.92
Tech Mahindra 37.57 23.52 21.09 16.98 23.55 24.79
HCL 47.3 39.92 27.07 32.04 33.14 35.89
Return on Capital Employed

Infosys Wipro TCS
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Analysis:
Although the Return on Assets of Infosys has actually been quite stable for the past 5 years, if
seen against the industry average it can be seen that it has actually been performing well above
its peers with it putting its Assets for better utilization. Wipro and Tech Mahindra have been the
worst performers in this regard with them being 42% and 25% down against the industry average
respectively.
Similarly, for all the above ratios under profitability Infosys has been hovering around the
industry average with Net profit margin taking a downward spin for the past 3 years and
increasing this year, all the while maintaining its position above the industry average throughout.
It can also be seen that the Return on Capital employed and Return on Equity for Infosys has
been below the benchmark for the past five years but has been covering the gap throughout.
Turnover Ratios
3.a) Accounts receivable turnover- This ratio provides the average number of times a firm is
able to collect it’s receivables. Although in this case having a high ratio might sound idle as a
high ratio indicates that customers of the firm are efficiently paying their dues without delay, but
too a high a ratio also suggests of a stringent credit policy by the firm which may hamper the
growth of the firm in the long run.
Accounts Receivable Turnover
Infosys 6.50 5.90 5.93 5.79 5.54 5.93
Wipro 6.45 7.89 10.29 5.66 5.56 7.17
TCS 5.06 4.90 4.88 5.05 5.18 5.01
Tech Mahindra 6.22 4.74 4.83 5.25 5.20 5.25
HCL 5.56 5.04 3.51 4.54 4.48 4.63
Accounts Receivable Turnover

12.00
10.00
8.00
6.00
4.00
2.00
0.00
Infosys Wipro TCS

3.b) Fixed Assets Turnover-

Fixed Assets Turnover
Infosys 3.6 3.12 3.67 3.66 3.45 3.59
Wipro 4.46 4.59 4.6 4.44 4.19 4.46
TCS 5.79 5.23 9.48 10.06 4.79 7.07
Tech Mahindra 3.55 4.33 3.97 3.96 3.89 3.94
HCL 3.71 3.26 2.62 3.34 2.06 3.00
Fixed Assets Turnover
12
10
0
Infosys Wipro TCS

3.c) Total Assets Turnover- The contribution of Assets towards sales is calculated by this ratio,
the efficiency with which each unit of Asset is contributing towards sales. A ratio which is
higher than its peers suggest optimum utilization of fixed assets to generate sales.
Total Assets Turnover
Infosys 0.82 1.00 0.88 0.87 0.98 0.91
Wipro 0.92 0.85 0.77 0.73 0.70 0.79
TCS 1.47 1.61 1.32 1.18 1.28 1.37
Tech Mahindra 1.23 1.50 1.47 1.36 1.26 1.36
HCL 0.8 0.91 0.63 0.88 1.05 0.85
Total Assets Turnover

1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Infosys Wipro TCS

Analysis:
On the Accounts receivable front, Infosys has been performing solid and way above the industry
Average, however it can also be seen that over the past five years it has been quite fluctuating in
nature and has been falling bit by bit.
Similarly, the Total Assets Turnover of Infosys shows that it has not been up to the par with
respect to its peers as it is below the industry average and most of the companies undertaken for
comparison and have not been as efficient in putting its assets to use. On similar lines is the fixed
Assets Turnover which forms around 37% of total Assets.
The Overall picture of Turnover picture of Turnover ratios show that although performing better
than most in the industry, Infosys is showing signs of weakness.
Leverage
4.a Debt Equity Ratio- This ratio is particularly significant for shareholders as it indicates the
proportion of long term debt financing with respect to equity. That is money owed to creditors
with respect to owners. A high Debt-Equity is considered risky by shareholders as a lot of debt
owed can lead to deteriorating financial health which may in turn lead to liquidation in which
case Creditors are considered first for payment of dues.
Debt-Equity
Infosys 0.01 0.00 0.00 0.00 0.01 0.00
Wipro 3.16 3.10 3.71 3.75 9.33 4.61
TCS 0.23 0.20 0.12 0.08 0.06 0.14
Tech Mahindra 0.20 0.37 1.33 2.28 3.98 1.63
HCL 0.05 0.03 0.03 0.02 0.02 0.03
Debt-Equity
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Infosys Wipro TCS

4.b Debt Capital Ratio- Similar to be Debt equity ratio, this ratio also considers the short term
debt and calculates the overall debt ratio in the capital employed by the company.
Debt-Capital
Infosys 0.01 0.00 0.00 0.00 0.01 0.00
Wipro 2.75 2.60 2.93 2.95 7.26 3.70
TCS 0.23 0.19 0.12 0.08 0.06 0.14
Tech Mahindra 0.20 0.35 1.24 2.11 0.92 0.97
HCL 0.04 0.03 0.03 0.02 0.02 0.03
Debt-Capital
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Infosys Wipro TCS

4.c Net Debt to earnings before interest depreciation and Amortization- It shows the
liabilities of the company with respect to its earnings and the ability of the company to cover
those after deduction of Non-cash expenses. A high ratio means that the company is in huge debt
and the earnings are not enough to cover those.
Analysis:
Infosys is totally equity funded company and hence there is no component of debt in its capital
structure. However, it is unlike the other companies in the industry. There is no standard trend
across the industry. HCL has a similar capital structure as Infosys. TCS has relatively employed
very less debt. Tech Mahindra doesn’t have a stable capital structure as it has been varying its
capital structure and this might have significantly impacted the financials of the company due to
varying finance costs. Wipro quite contrary to the existing players has huge debt and takes the
benefit of this financial leverage by trading on equity. This however increases the financial risk
of the company.
Common Size Balance Sheet & Income Statement Analysis
The company is mostly financed by the owner’s fund. The debt component is a very less
proportion of the capital structure and hence the company is not availing the benefit of trading on
equity. The company has enough financial soundness and credit worthiness that it can raise debt
from the market. The debt being a cheaper source of finance will boast the Earnings per share
and increase the shareholders’ wealth.
The capital of the company is significantly invested in the current assets which has been
constantly around 70%. The investment in current assets is not very productive in comparison to
the fixed assets. It does not yield in improving the long term growth prospects of the company.
The fixed assets on the other side increases the future earning capacity of the company and
generates positive future economic returns. We can see that the cash & cash equivalents
contribute to 45% of the total assets which is huge figure. It indicates that the company is over-
financed as the cash is considered to be an idle asset as does not offers any return and its value
actually depreciates over time. The company should reduce the proportion of cash component by
either reducing the capital or invest this in profitable ventures. We can observe a trend of the
company gradually doing that and it should continue to do for some more years to bring it within
acceptable range.
The company has been steadily increasing the investments over the years. This reflects that the
company has not been able to invest the surplus funds in the business operations and hence is
looking for alternative sources for investment.
Common-Sized Income Statement (Infosys Ltd)
Particulars FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Revenue 100% 100% 100% 100% 100%
+ Sales & Services Revenue 100% 100% 100% 100% 100%
- Cost of Revenue 64% 62% 63% 63% 64%
+ Cost of Goods & Services 64% 62% 63% 63% 64%
Gross Profit 36% 38% 37% 37% 36%
- Operating Expenses 12% 13% 12% 12% 12%
+ Selling, General & Admin 12% 12% 7% 12% 12%
+ Selling & Marketing 5% 6% 0% 5% 5%
+ General & Administrative 7% 7% 7% 7% 7%
+ Depreciation & Amortization 0% 0% 2% 0% 0%
+ Other Operating Expense 0% 0% 0% 0% 0%
Operating Income (Loss) 24% 26% 25% 25% 24%
- Non-Operating (Income) Loss -6% -7% -5% -4% -4%
+ Interest Expense, Net -4% -5% -4% -4% -3%
- Interest Income 4% 5% 4% 4% 3%
+ Foreign Exch (Gain) Loss 0% -1% 0% 0% 0%
+ Other Non-Op (Income) Loss -1% -1% 0% 0% -1%
Pre-tax Income (Loss), Adjusted 30% 33% 30% 29% 29%
Pre-tax Income (Loss), GAAP 29% 32% 30% 29% 29%
- Income Tax Expense (Benefit) 8% 9% 8% 8% 6%
+ Current Income Tax 0% 0% 9% 0% 6%
Income (Loss) from Cont Ops 21% 23% 22% 21% 23%
- Net Extraordinary Losses (Gains) 0% 0% 0% 0% 0%
Net Income, GAAP 21% 23% 22% 21% 23%
We can observe that the percentage contributions of the various expense heads to the overall cost
structure is almost similar across the years. This signifies that there has been no major change in
the operation or the strategy of the company. It has been consistently generating good profit
margins and the financial & growth prospects of the company looks good. It has been able to
achieve stable revenue figures for the period. The company has almost nil financial obligations
as it is equity funded.

Financial Statement Analysis Assignment - Group-H2 - Section-2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Statement Analysis Assignment - Group-H2 - Section-2

Uploaded by

Copyright:

Available Formats

FINANCIAL RATIO ANALYSIS

Infosys Wipro TCS

Quick Ratio = Current Assets-Inventories-Prepaid Expenses/Current Liabilities

Infosys Wipro TCS

Net Profit Margin

Return on Capital Employed

Accounts Receivable Turnover

Infosys Wipro TCS

3.b) Fixed Assets Turnover-

Infosys Wipro TCS

Total Assets Turnover

Infosys Wipro TCS

Infosys Wipro TCS

Infosys Wipro TCS

Particulars FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

You might also like