22902409 Financial ratio analysis infosys Project Report PDF

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Infosys Technologies Limited

Financial Statements Ratio Analysis Sandeep Sahu M-09-28 Saurabh Sharma M-09-29 Saurav Kumar M-09-30 Sreelal M.S. M-09-31

Project report in partial fulfillment of the course of Managerial Accounting at Rajiv Gandhi Institute of Petroleum Technology Rae Bareilly, Uttar Pradesh

This report aims at analyzing various financial statements of Infosys Technologies Limited and interpreting the impact of these ratios on the financial decision-making.

Financial Statements Ratio Analysis Table of Contents

1- About Infosys 2- Fact File of Infosys 3- OBJECTIVE 4- RATIO ANALYSIS 5- OBJECTIVE OF RATIOS 6- FORMS OF RATIO 7- STEPS IN RATIO ANALYSIS 8- Parties interested in Ratio Analysis 9- Operational & Financial Ratios 10-Margin Ratios 11- Performance Ratios 12-Efficiency Ratios 13-Financial Stability Ratios 14-Analysis of Financial Ratios 15-Conclusions 16-Annexure 1 17-Annexure 2

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Financial Statements Ratio Analysis

About Infosys

Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven people with US$ 250. Today, we are a global leader in the "next generation" of IT and consulting with revenues of over US$ 4 billion. Infosys defines designs and delivers technology-enabled business solutions that help Global 2000 companies win in a Flat World. Infosys also provides a complete range of services by leveraging our domain and business expertise and strategic alliances with leading technology providers. Infosys' offerings span business and technology consulting, application services, systems integration, product engineering, custom software development, maintenance, re-engineering, independent testing and validation services, IT infrastructure services and business process outsourcing Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive force in the industry leading to the rise of offshore outsourcing. The GDM is based on the principle of taking work to the location where the best talent is available, where it makes the best economic sense, with the least amount of acceptable risk. Infosys has a global footprint with over 50 offices and development centres in India, China, Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its subsidiaries have 105,453 employees as on September 30, 2009 Infosys takes pride in building strategic long-term client relationships. Over 97% of our revenues come from existing customers.

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Financial Statements Ratio Analysis

Fact File of Infosys Infosys Technologies Ltd (NASDAQ: INFY) delivers IT-enabled business solutions to enable Global 2000 companies win in a Flat World. Our solutions focus on providing strategic differentiation and operational superiority to clients. We leverage our domain and business expertise along with a complete range of services. With Infosys, clients are assured of a transparent business partner, world-class processes, speed of execution and the power to stretch their IT budget by leveraging the Global Delivery Model that Infosys pioneered. Infosys has a global footprint with sales offices in 30 countries and development centres in India, US, China, Australia, UK, Canada, Japan and many other countries. Infosys has over 105,000 employees of 73 nationalities.

Key Facts Senior Executives

Chairman of the Board and Chief Mentor:

Narayana N.R. Murthy

Chief Executive Officer and Managing Director :

S. Gopalakrishnan

Financial Summary (LTM Sep 09) IFRS Revenues:

US$ 4,568

4

Financial Statements Ratio Analysis million Net Income after taxes:

US$ 1,283 million

Earnings per ADS:

US$ 2.25 (basic)

Total assets:

US$ 5,188 million

Cash and cash equivalents:

US$ 2,878 million

Indian GAAP (consolidated) Total Income :

Rs. 22,478 crore

Net profit after taxes :

Rs. 6,321 crore

Earnings per share (Rs. 5) :

Rs. 110.34 (basic)

Total assets :

Rs. 20,757 crore

Cash and cash equivalents :

Rs. 13,796 crore

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Financial Statements Ratio Analysis

OBJECTIVE: To understand the information contained in financial statements with a view to know the strength or weaknesses of the firm and to make forecast about the future prospects of the firm and thereby enabling the financial analyst to take different decisions regarding the operations of the firm.

RATIO ANALYSIS: Fundamental Analysis has a very broad scope. One aspect looks at the 6

Financial Statements Ratio Analysis general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results. Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future.

MEANING OF RATIO: A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other related figure. Thus a ratio is an expression relating one number to another. It is simply the quotient of two numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute figures as “so many times”. As accounting ratio is an expression relating two figures or accounts or two sets of account heads or group contain in the financial statements.

MEANING OF RATIO ANALYSIS: Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial health and profitability of business enterprises. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of an annalist but their group of ratio he would prefer depends on the purpose and the objective of analysis.

While a detailed explanation of ratio analysis is beyond the scope of this section, we will focus on a technique, which is easy to use. It can provide you with a valuable investment analysis tool.

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Financial Statements Ratio Analysis This technique is called cross-sectional analysis. Cross-sectional analysis compares financial ratios of several companies from the same industry. Ratio analysis can provide valuable information about a company's financial health. A financial ratio measures a company's performance in a specific area. For example, you could use a ratio of a company's debt to its equity to measure a company's leverage. By comparing the leverage ratios of two companies, you can determine which company uses greater debt in the conduct of its business. A company whose leverage ratio is higher than a competitor's has more debt per equity. You can use this information to make a judgment as to which company is a better investment risk. However, you must be careful not to place too much importance on one ratio. You obtain a better indication of the direction in which a company is moving when several ratios are taken as a group.

OBJECTIVE OF RATIOS Ratio is work out to analyze the following aspects of business organizationA) Solvency1) Long term 2) Short term 3) Immediate B) Stability C) Profitability D) Operational efficiency E) Credit standing F) Structural analysis G) Effective utilization of resources H) Leverage or external financing

FORMS OF RATIO: Since a ratio is a mathematical relationship between to or more variables / accounting figures, such relationship can be expressed in different ways as follows – A] As a pure ratio: 8

Financial Statements Ratio Analysis For example the equity share capital of a company is Rs. 20,00,000 & the preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is 20,00,000: 5,00,000 or simply 4:1. B] As a rate of times: In the above case the equity share capital may also be described as 4 times that of preference share capital. Similarly, the cash sales of a firm are Rs. 12,00,000 & credit sales are Rs. 30,00,000. so the ratio of credit sales to cash sales can be described as 2.5 [30,00,000/12,00,000] or simply by saying that the credit sales are 2.5 times that of cash sales. C] As a percentage: In such a case, one item may be expressed as a percentage of some other item. For example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs. 10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]

STEPS IN RATIO ANALYSIS The ratio analysis requires two steps as follows: 1] Calculation of ratio 2] Comparing the ratio with some predetermined standards. The standard ratio may be the past ratio of the same firm or industry’s average ratio or a projected ratio or the ratio of the most successful firm in the industry. In interpreting the ratio of a particular firm, the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared with some predetermined standard. The importance of a correct standard is oblivious as the conclusion is going to be based on the standard itself.

Parties interested in Ratio Analysis Ratio analysis serves the purpose of various parties interested in financial statements. Primarily the objective of ratio analysis and interpreting the financial statements is to get adequate information useful for the performance of various functions like planning, coordinating, controlling, communication and forecasting etc. 9

Financial Statements Ratio Analysis The interested parties may be:

Share holders/Investors: Investor in the company will like to access the financial position of company where he is going to invest. The first concern would be the security of the investment and then the return on the investment in the form of interest and dividends. So, Investors concentrate on the firm’s financial structure to the extent that influences the firm’s earning ability and risk.

Trade creditors: They are interested in firm’s ability to meet its claims over a short period of time. So their analysis is usually confined to evaluation of firm’s liquidity position.

The long term creditors: They are concerned with firm’s long term future solvency and survival. They analyze the firm’s profitability over a period of time, its ability to generate cash, ability to pay interest, repay the principle and relationship between various sources of funds.

Employees: Employees are interested in financial position the concern especially profitability. Their wages and amount of fringe benefits are related to the volume of profits earned by the concern. The employees make use of the information available in the financial statements.

Government: Government is interested to know the overall financial health of the company. Various financial statements published by the industrial units are used to calculate the ratios for determining short-term, long-term and overall financial position of the firm. Government may base its future policies on the basis of industrial information available from various units.

Management: Management of the firm requires these statements for its own evaluation and decision making. Moreover, it is responsible for the overall performances of the firm maintaining its solvency so as to be able to meets short-term and long-term obligations to the creditors and at the same time ensuring an adequate rate of return, consistent with safety of funds of its owner. Financial analysis may not provide exact answer to the questions but it will be an indication of forthcoming future. 10

Financial Statements Ratio Analysis

1- Operational & Financial Ratios (a) Earnings Per Share (Rs)

Meaning: Earnings per Share are calculated to find out overall profitability of the organization. Earnings per Share represent earning of the company whether or not dividends are declared. If there is only one class of shares, the earning per share are determined by dividing net profit by the number of equity shares. EPS measures the profits available to the equity shareholders on each share held. Formula: NPAT 11

Financial Statements Ratio Analysis Earnings per share = Number of equity share The higher EPS will attract more investors to acquire shares in the company as it indicates that the business is more profitable enough to pay the dividends in time. But remember not all profit earned is going to be distributed as dividends the company also retains some profits for the business. For Infosys the variance of EPS ratio for 5 years is Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

108.08

78.06

65.42

90.65

68.38

Ob j e ct3

(b)Cash earnings per share Ratio : Formula: (Net operating cash flow-current depreciation of fixed assets-amortization of intangible assets-amortization deferred charges-interest expense and cost of raising funds in cash + investment income in cash) Total equity

For Infosys the variance of CEP ratio for 5 years is –

Mar09

Mar08

Mar07

Mar06

Mar05 12

Financial Statements Ratio Analysis 113.86

87.69

74.34 102.54

80.44

Ob j e ct5

(c) DIVIDEND PER SHARE:Meaning: DPS shows how much is paid as dividend to the shareholders on each share held. Formula: Dividend Paid to Ordinary Shareholders Dividend per Share = Number of Ordinary Shares For Infosys the variance of DPS ratio for 5 years is

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Financial Statements Ratio Analysis Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

24.15

44.35

17.66

49.89

16.2

Ob j e ct7

(d)Book NAV/Share(Rs) An expression for net asset value that represents a fund's (mutual, exchange-traded, and closed-end) value per share. It is calculated by dividing the total net asset value of the fund or company by the number of shares outstanding. It is also referred to as "book value per share". Calculated as:

Mar-

Mar-

Mar-

Mar-

Mar14

Financial Statements Ratio Analysis 09 08 07 06 05 311.35 235.84 195.14 249.89 194.15

Ob j e ct9

(e) Tax Rate: An average tax rate is the ratio of the amount of taxes paid to the tax base (taxable income or spending). To calculate the average tax rate on an income tax, divide total tax liability by taxable income: • Let a be the average tax rate. • Let t be the tax liability. Let i be the taxable income. For Infosys the variance of tax ratio for 5 years is Mar09 13.33

Mar08 12.35

Mar07 8.51

Mar06 11.12

Mar05 14.58

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Financial Statements Ratio Analysis

Ob j e ct11

2- Margin Ratios (a) Core EBITDA Margin ratio : EBITDA is the acronym for Earnings before Interest, Taxes, Depreciation, and Amortization. EBITDA Margin refers to EBITDA divided by total revenue. EBITDA margin measures the extent to which cash operating expenses use up revenue. Mar09 36.57

Mar08 36.09

Mar07 34.98

Mar06 34.71

Mar05 35.76

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Financial Statements Ratio Analysis

Ob j e ct14

(b)EBIT Margin rartio: In financial and business accounting, earnings before interest and taxes (EBIT) or operating income is a measure of a firm's profitability that excludes interest and income tax expenses.[1] EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income Operating Income = Operating Revenue – Operating Expenses Mar09 33.14

Mar08 32.6

Mar07 31.45

Mar06 30.18

Mar05 32.51

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Financial Statements Ratio Analysis

Ob j e ct17

(c)Pre Tax Margin: Net Earnings + Income Tax Pre tax Margin = Net Sales Explanation of Pre tax Margin: The Pre tax Margin measures how well a company can generate before-tax profits at the current level of sales. Importance of Pretax Margin: As with any margin, a high or increasing Pretax Margin is usually a positive sign, showing the company is able to keep its operations costs low, while being able to pull in strong earnings. The Pretax Margin varies greatly between industries, so you will have to compare the results for the company you are analyzing to industry averages. Mar09 33.13

Mar08 32.59

Mar07 31.45

Mar06 30.17

Mar05 32.49

Ob j e ct19

(d)PAT Margin rate : 18

Financial Statements Ratio Analysis The after tax profit margin ratio tells you the profit per sales dollar after all expenses are deducted from sales. In other words, the after tax profit margin ratio shows you the percentage of net sales that remains after deducting the cost of goods sold and all other expenses including income tax expense. The calculation is: Net Income after Tax /Net Sales. The profit margin ratio is most useful when it is compared to 1) the same company’s profit margin ratios from earlier accounting periods, 2) the same company’s targeted or planned profit margin ratio for the current accounting period, and 3) the profit margin ratios of other companies in the same industry during the same accounting period. Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

27.52

27.37

28.05

26.17

27.28

Ob j e ct21

(e) Cash Profit Margin ratio Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

30.66

28.23

28.57

28.58

30

Ob j e ct24

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Financial Statements Ratio Analysis

3- Performance Ratios (a) ROA ratio : The return on assets (ROA) percentage shows how profitable a company's assets are in generating revenue. ROA can be computed as: This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control. Its a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Return on assets gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets. Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

34.76

33.09

33.47

36.21

35.29

Ob j e ct27

(b) ROE ratio : Return on Equity (ROE, Return on average common equity, return on net worth, Return on ordinary shareholders' funds) (requity) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets...