Integrated Ratio

Analysis
and
Return on
Investment
Introduction
A very Good Morning to one and all!
The topic for our presentation is Integrated Ratio Analysis and Return on Investment(ROI).
A financial analysis will not only help you understand your company's financial condition,
helping you determine its creditworthiness, profitability and ability to generate wealth, but will
also provide you with a more in-depth look at how well it operates internally. This analysis is
therefore a valuable health check-up that will help you better understand your company's needs.
It can provide you with a more comprehensive overview of your company’s current situation and
help you optimize its management, which could ultimately lead to greater profits and increased
financial security.
 Ratio Analysis
Ratio analysis is the quantitative interpretation of the company’s
financial performance. It is the study or analysis of the line items
present in the financial statements of the company. It provides
valuable information about the organization’s profitability, solvency,
operational efficiency and liquidity positions as represented by the
financial statements.
 Types of Ratio Analysis
•. Liquidity Ratios: It measure a company's ability to pay off its short-term debts as they become due,
using the company's current or quick assets. It includes the current ratio, quick ratio, and working
capital ratio.
•. Solvency Ratios: Solvency ratios compare a company's debt levels with its assets, equity, and
earnings, to evaluate the likelihood of a company staying afloat over the long haul, by paying off its
long-term debt as well as the interest on its debt. Examples of solvency ratios include: debt-equity
ratios, debt-assets ratios, and interest coverage ratios.
• Profitability Ratios: These ratios convey how well a company can generate profits from its
operations. Profit margin, return on assets, return on equity, return on capital employed, and gross
margin ratios are all examples of profitability ratios.
• Efficiency Ratios: Also called activity ratios, efficiency ratios evaluate how efficiently a company
uses its assets and liabilities to generate sales and maximize profits. Key efficiency ratios include:
turnover ratio, inventory turnover, and days' sales in inventory.
 Key Financial Ratios
• Current Ratio: Formula: Current Assets / Current Liabilities. Interpretation: Measures a company's short-
term liquidity. A ratio above 1 indicates the company can meet its short-term obligations.
• Quick Ratio (Acid-Test Ratio): Formula: (Current Assets - Inventory) / Current Liabilities. Interpretation: A
more stringent measure of short-term liquidity, excluding inventory. It shows a company's ability to pay its
current liabilities without relying on selling inventory.
• Return on Assets (ROA): Formula: Net Income / Total Assets. Interpretation: Measures how efficiently a
company uses its assets to generate profit. A higher ROA indicates better asset utilization.
• Return on Equity (ROE):Formula: Net Income / Shareholders' Equity. Interpretation: Evaluates the return
generated for shareholders' equity. A higher ROE signifies better profitability from shareholder investments.
• Gross Profit Margin: Formula: (Gross Profit / Revenue) x 100. Interpretation: Measures the percentage of
revenue retained after accounting for the cost of goods sold. Higher margins indicate better profitability.
 Importance of Ratio Analysis
• Forecasting and Planning: The trend in costs, sales, profits and other facts can be
known by computing ratios of relevant accounting figures of last few years. This trend
analysis with the help of ratios may be useful for forecasting and planning future
business activities.
• Measurement of Operating Efficiency: Ratio analysis indicates the degree of
efficiency in the management and utilization of its assets. Different activity ratios
indicate the operational efficiency.
•Inter- Firm Comparison: The relevant ratios of the organization can be compared
with the average ratios of the industry or other firms to reveal efficient and inefficient
firms, thereby enabling the inefficient firms to adopt suitable measures for improving
their efficiency. The best way of inter-firm comparison is to compare.
• Indication of Overall Profitability: Profitability Ratios help to determine how profitable
a firm is. Return on Assets and Return on Equity helps to understand the ability of the firm
to generate earnings.
• Helps In Identifying Business and Financial Risks: Calculating the leverages (financial
leverage and operating leverages) allows the firm to understand the business risk, whereas
ratios like interest coverage ratio, DSCR ratio etc., helps the firm to identify financial risks
and understand how it depends on external capital and whether it can repay the debt using
its wealth.
• Indication of Liquidity Position: Ratio analysis helps to assess the liquidity position i.e.,
short-term debt paying ability of a firm. Liquidity ratios indicate the ability of the firm to
pay and help in credit analysis by banks, creditors and other suppliers of short-term loans.
• Indication of Long-term Solvency Position: Ratio analysis is also used to assess the
long-term debt-paying capacity of a firm. Long-term solvency position of a borrower is a
prime concern to the long-term creditors, security analysts and the present and potential
owners of a business.
Limitations of Ratio Analysis
• Ratio analysis information is historic – it is not current.
•It does not take into account price level changes.
• It does not measure the human element of a firm.
• It can only be used for comparison with other firms of the same
size and type.
• Different accounting policies regarding valuation of inventories,
charging depreciation etc. make the accounting data and accounting
ratios of two firms non-comparable.
• It may lead to window dressing and manipulation of accounts.
Integrated Ratio Analysis
An integrated financial ratio analysis contributes to preventing or ameliorating the
non-efficient allocation of resources associated with deplorable creative
accounting practices, that creates welfare loses to the detriment of shareholders,
stakeholders and ultimately to society as a whole through an analysis of its
components. The ratios discussed so far measure a firm’s liquidity, solvency,
efficiency of operations and profitability independent of one another. However,
there exists an interrelationship among these ratios. This aspect is brought out by
integrated analysis of ratios. (ROA) and return on equity (ROE) are understood
better. The dis-aggregation of ratios can reveal certain major economic and
financial aspects, which otherwise would have been ignored.
Integrated ratio analysis is a way to synthesize and interpret financial data from
multiple angles to make more informed decisions.
Here's how it works:
• Selecting Key Ratios: The first step in integrated ratio analysis is to select a set of
key financial ratios that are relevant to the industry and the specific goals of the
analysis.
• Gathering Data: Collect the financial data necessary to calculate these ratios from
the company's financial statements, such as the balance sheet and income statement.
• Calculation: Calculate the selected ratios. Each ratio provides insight into a specific
aspect of the company's financial performance.
• Interpretation: Interpret each ratio individually. Understand what it signifies and
how it relates to the company's financial health.
• Integration: Integrated ratio analysis involves looking at the ratios collectively.
This means considering how changes in one ratio might impact another. For
example, an increase in a company's debt-to-equity ratio may result in higher
interest expenses (which impacts profitability) but also lead to more assets or
investments (which could increase future revenues).
• Benchmarking: Compare the calculated ratios to industry benchmarks and the
company's historical performance. This helps in assessing whether the company is
performing better or worse compared to its peers and its own past performance.
• Identifying Strengths and Weaknesses: Integrated ratio analysis allows you to
identify the strengths and weaknesses of the company.
• Forecasting: Integrated ratio analysis can be used to make financial forecasts. By
understanding how different ratios interact, you can project the potential impact
of changes in the company's financial structure or operating performance.
• Decision Making: The insights derived from integrated ratio analysis can guide
decision-making processes.
Return On Investment
Return on Investment (ROI) is a financial metric that measures the
profitability and efficiency of an investment. It is expressed as a ratio
or percentage and is used to evaluate the return or gain on an
investment relative to its cost. ROI is closely related to measures like
return on assets (ROA) and return on equity (ROE).
Importance of ROI
ROI is a crucial financial metric in business and personal finance for several reasons:
• Performance Evaluation: ROI allows investors to compare the returns from different
investments to determine which ones are more profitable.
• Risk Assessment: ROI takes into account both the return and the cost of an investment
such that, the investors can assess whether the potential return justifies the associated
risk and expenses.
• Decision-Making: ROI plays a critical role in investment decision-making. Individuals
or businesses can use ROI as a basis for choosing the most attractive options.
• Resource Allocation: In a business context, ROI helps in allocating resources
efficiently. Companies can prioritize projects or initiatives with higher ROI to maximize
profitability.
.
• Performance Improvement: Monitoring ROI over time can help identify underperforming
investments.

• Budgeting: ROI is often used in budgeting and financial planning. It assists in setting financial
goals, allocating funds, and evaluating the expected returns on various expenditures.

• Capital Budgeting: In capital budgeting, ROI helps in deciding whether to invest in long-term
capital projects.

• Accountability: ROI serves as a measure of accountability. It provides a clear and quantifiable

way to evaluate the performance of financial investments and initiatives.

• Communication: ROI is a useful metric for communicating the financial results and potential
benefits of an investment to stakeholders.

• Continuous Improvement: By continually tracking ROI, individuals and organizations can focus
on optimizing their investments and strategies over time, aiming to achieve higher returns and
efficiency.
 Limitations of ROI
ROI is not without limitations.
• Time: First and foremost, ROI does not take time into account.If one investment had an ROI
of 20% over five years and another had an ROI of 15% over two years, the basic ROI
calculation cannot help you determine which investment was best. That’s because it doesn’t
take into account compounding returns over time.
• Cost: Accurate ROI calculations depend on factoring in all costs, not merely the initial cost of
the investment itself. Transaction costs, taxes, maintenance costs and other ancillary
expenditures need to be baked into your calculations.
• Risk assessment: Finally, an ROI calculation that depends on estimated future values but
does not include any kind of assessment for risk can be a problem for investors. It is easy to be
tempted by high potential ROIs. But the calculation itself does not give any indication of how
likely that kind of return will be. This means investors should tread carefully.
Formula and its components
To calculate return on investment, divide the amount you earned from an investment, or the cost of the
investment minus its present value—by the cost of the investment and multiply that by 100.
The result should be represented as a percentage. Here are two ways to represent this formula:
ROI = (Net Profit / Cost of Investment) x 100
ROI = (Present Value – Cost of Investment / Cost of Investment) x 100
Let’s say you invested INR 5,000 in the company XYZ last year, for example, and sold your shares for
INR 5,500 this week. Here’s how you would calculate your ROI for this investment:
ROI = ( INR 5,500 – INR 5,000 / INR 5,000 ) x 100
Your return on investment in company XYZ would be 10%. Instead of a specific amount, we can take
this percentage and compare it to the ROI percentage of other investments across different asset classes
or currencies to determine which gives the highest yield.
 Interpretation of ROI
When interpreting ROI calculations, it's important to keep a few things in mind.
• First, ROI is typically expressed as a percentage because it is intuitively easier to
understand than a ratio.
• Second, the ROI calculation includes the net return in the numerator because returns
from an investment can be either positive or negative. When ROI calculations yield a
positive figure, it means that net returns are in the black (because total returns exceed
total costs). But when ROI calculations yield a negative figure, it means that the net
return is in the red because total costs exceed total returns.
• Finally, to calculate ROI with the highest degree of accuracy, total returns and total costs
should be considered. The ROI formula can be deceptively simple. It merely depends on
an accurate accounting of costs.

Case Study
ANALYSING PROFITABILITY
OF INDIAN I.T. GIANTS: A CASE
STUDY OF TCS AND WIPRO
• ABSTRACT: The present study is
conducted with the objective of
analysing return on equity and
return on investment offered by two
leading I.T. companies of India i.e.
Tata Consultancy Services (TCS)
and Wipro within a span of 10 years
(March-2007 to March-2016).
Return on investment and return on
equity are two significant
profitability ratios which helps an
investor in making investment
decisions in any company. A
company with higher ROE and ROI
can be lucrative for investors and
vice-versa. This paper is a modest
attempt to study the ROE and ROI
positions of TCS and Wipro.
• INTRODUCTION
Tata Consultancy Services is a part of Tata group engaged in offering
I.T. and I.T. enabled services with the assistance of its Global
Network Delivery Model. TCS was established in 1968 as a division
of Tata Sons Limited and corporatized into a separate company from
1-04-2004. Today, Tata Consultancy Services has over 353000 I.T.
consultants in 45 countries. The services offered by TCS includes
application development and maintenance, assurance services,
business process services, consulting, enterprise security and risk
management, connected marketing, social computing, banking,
financial services, insurance, media and information services,
healthcare and so on. Another giant in Indian I.T. sector Wipro is also
engaged in providing wide range of I.T. services like technology
infrastructure services, R&D services, system integration, consulting
etc. Today, Wipro has more than 17000 workforces which
successfully serve its clients in more than 175 cities across 6
continents. Return on Equity (ROE) and Return on Investment (ROI)
are two important profitability ratios which helps to gauge a
company’s profitability by taking into account the funds of equity
shareholders and total capital employed in the company. Return on
equity helps equity shareholders in knowing the earning capacity of
their funds in the business whereas return on investment helps in
analysing overall profitability of the business.
1.1. Formula
ROE = Net Profit after Interest, Tax and Preference Dividend/Equity Shareholder’s Fund
ROI = Profit before Interest, Tax and Dividend/Capital Employed
1.2. Objectives of the Study
• To calculate Return on Equity of TCS and Wipro. • To make a comparative analysis of ROE of TCS and Wipro. •
To calculate Return on Investment of TCS and Wipro. • To make a comparative study of ROI of TCS and Wipro.
1.3. Hypothesis of the Study
H0(1) There is no significant difference between ROE of TCS and Wipro.
Ha(1) There is a significant difference between ROE of TCS and Wipro.
H0(2) There is no significant difference between ROI of TCS and Wipro.
Ha(2) There is a significant difference between ROI of TCS and Wipro. The above hypotheses have been tested
through t-test.
2. RESEARCH METHODOLOGY
In order to estimate “return on equity” and “return on investment” of TCS and Wipro, secondary data has been used
and appropriate data in this aspect has been assembled from annual reports of TCS and Wipro, websites, journals etc.
Further, the collected data has been infused in tables and figures and appropriate statistical tools have been applied
in order to give a meaningful conclusion to the study.
2.1. Time Period
ROE and ROI of TCS and Wipro has been calculated from March 2007 to March 2016.
3. ANALYSIS AND INTERPRETATION
With the objective of calculating return on equity and return on investment of TCS and Wipro, a number of tables
and figures have been constructed which are demonstrated in the next slide:
 Return on Equity (TCS v/s WIPRO)
Years TCS (return on equity) WIPRO (return on
equity)
Mar-07 46.62 30.50
Mar-08 41.35 26.52
Mar-09 35.14 23.76
Mar-10 37.30 27.69
Mar-11 38.80 22.72
Mar-12 44.25 19.24
Mar-13 39.33 23.32
Mar-14 41.87 25.16
Mar-15 42.40 23.66
Mar-16 38.87 19.80
 Return on Investment (TCS v/s WIPRO)
Years TCS (return on WIPRO (return on
investment) investment)
Mar-07 51.76 33.32
Mar-08 45.46 23.33
Mar-09 38.17 29.66
Mar-10 42.11 32.56
Mar-11 44.46 25.12
Mar-12 53.63 24.57
Mar-13 48.20 31.12
Mar-14 53.39 32.88
Mar-15 52.99 30.60
Mar-16 49.44 26.18
3.1. Hypothesis Testing
H0(1) There is no significant difference between ROE of TCS and Wipro.
Ha(1) There is a significant difference between ROE of TCS and Wipro.
H0(2) There is no significant difference between ROI of TCS and Wipro.
Ha(2) There is a significant difference between ROI of TCS and Wipro.
The above hypotheses have been tested through t-test.
4. CONCLUSION
On the basis of above study the following conclusions can be drawn:
• Return on equity of TCS is better than return on equity of Wipro.
• Return on investment of TCS is better than return on investment of Wipro.
• There is a significant difference between ROE of TCS and Wipro.
• There is a significant difference between ROI of TCS and Wipro.
5. REFERENCES
[1] http://www.tcs.com/about/corp_facts/Pages/default.aspx
[2] http://www.wipro.com/about-Wipro/
[3] http://www.moneycontrol.com/financials/tcs/balance-sheetVI/TCS
[4] http://www.moneycontrol.com/stocks/company_info/print_main.php
[5] http://www.moneycontrol.com/financials/wipro/balance-sheetVI/W#W
[6] Cited by Dr. Vineet Singh
 Importance of Integration
The various profitability ratios throw light on the profitability of a firm from the viewpoint of (i) the
owners of the firm, and (ii) the operating efficiency of the firm. The ratios covered under the rate of return
to the equity-holders fall under the first category. The operating efficiency of a firm in terms of the
efficient utilization of the resources is reflected in net profit margin. It has been observed that although a
high profit margin is a test of better performance, a low margin does not necessarily imply a lower rate of
return on investments if a firm has higher investments.
Therefore, the overall operating efficiency of a firm can be assessed on the basis of a combination of the
two. The combined profitability is referred to as earning power/return on investment (ROI) ratio. The
earning power of a firm may be defined as the overall profitability of an enterprise. This ratio has two
elements: (i) profitability on sales as reflected in the net profit margin, and (ii) profitability of assets which
is revealed by the assets/investment turnover. The earning power (ROI ratio) of a firm can be computed by
multiplying the net profit margin and the assets turnover.
Thus, Earning power = Net profit margin x Assets turnover where, Net Profit margin= earnings after
tax/sales Assets Turnover= Sales/ Total Assets.
Conclusion
Key takeaways-:
1. Financial Ratios are of various types like solvency ratios , profitability ratios,
etc.
2. Financial ratios give a better understanding of the financial position of the
company.
3. Return on investment is the most significant ratio to determine whether a
business is performing well or not.
4. Integration of ROI with other ratios gives a better and more comprehensive
understanding of the business performance.