Financial Analysis of Infosys Technologies LTD.: Executive Summary

Financial analysis of Infosys Technologies LTD.
Executive Summary
Project title Financial statement analysis of Infosys Technologies Ltd. (2007-2010) In this project we have studied Infosys Technologies Ltd and its analysis of their financial statements. Objective The main objective of the project is to understand the information contained in the financial statement of the company with the 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. Technique used for analysis of financial statement Ratio analyse Findings After through study on Infosys Technologies Ltd we reached to the conclusion that Infosys is the leading company in software program providers and continues to do so in the coming times. In spite of the growing competition from companies like TCS, IBM, Wipro Infosys Technologies Ltd market has not been affected. And the level of profit and will have tend to increase. Recommendations Company needs to have stringent credit policy to reduce the funds required for working capital. Do efficient utilization of shareholders funds to improve its ROE and ROI to maintain its goodwill investors mind. May go for some debt borrowing to increase reserves and surplus for shareholders.
1.1History
The last 20 years of the 20th century was most significant period for Indian economy. During this period the nation has identified its economic destiny with great clarity. The most precious achievements of this period was the development of Information Technology. Indian Software industry has made significant contributions to the world of IT by gifting some of the leaders of the industry from Indian soil. Infosys and Wipro are already within the top ten leaders of the list, and many others are occupying significant in the list.
The industry has been performing at a staggering rate of growth of about 50 per cent every year and has sustained global competition. The government of India has been helping the development of domestic IT industry with a view to tap the maximum potential of the sector. It has created a ministry for the purpose, and the other steps include removing license rule, creating industry friendly government departments, offering tax holidays, allowing foreign investment in the sector, and promoting NRIs to set up business in India and by creating special economic zones.
1.2Career Prospects
The Indian IT sector is growing rapidly and it has already made its presence felt in all parts of the world. IT has a major role in strengthening the economic and technical foundations of India. Indian professionals are setting up examples of their proficiency in IT, in India as well as abroad.
The sector can be classified into 4 broad categories - IT Services, Engineering Services, ITES-BPO Services, EBusinessIT Services can further be categorized into Information Services (IS) outsourcing, packaged software support and installation, systems integration, processing services, hardware support and installation and IT training and education. Engineering Services include Industrial Design, Mechanical Design, Electronic System Design (including Chip/Board and Embedded Software Design), Design Validation Testing, Industrialization
2
and
Prototyping.
IT Enabled Services are services that use telecom networks or the Internet. For example, Remote Maintenance, Back Office Operations, Data Processing, Call Centers, Business Process Outsourcing, etc.
E Business (electronic business) is carrying out business on the Internet; it includes buying and selling, serving customers and collaborating with business partners.
1.3 Major Trends
The bar chart shows that the recruitment of engineers and IT professionals in the industry is growing at the Compound Annual Rate of 14.5% approximately.
In the FY06, the direct employment in the IT-ITES sector was 1.3 million people and the indirect employment was 3 million approximately. Trends in Salary Hikes Along with abundant growth opportunities; IT sector is one of the highest paying sectors. The average increase in salary in IT sector across the levels was around 16% and the average increase in the Its BPO sector across the levels was in between 16%-18%
IT: Success Factors Increasing number of skilled professionals in IT.
The demographic factor. Approximately 60% of the population of India lies in the age group of 15-65. More than half of the population of India is below the age of 25. So in the future, the number of working people is going to be more than the number of dependants. The vast academic infrastructure of India. In the year 2006, Total Enrollment in colleges was 9.3 million and India produced 441,000 Technical graduates. India has the second largest English-speaking workforce in the world
1.4Swot Analysis
Strengths

Weaknesses Absence of practical knowledge Dearth of suitable candidates Less Research and Development Contribution of IT sector to Indias GDP is still rather small. Employee salaries in IT sector are increasing tremendously. Low wages benefit will soon come to an end.
Highly skilled human resource Low wage structure Quality of work Initiatives taken by the Government (setting up Hi-Tech Parks and implementation of egovernance projects)
Many global players have set-up operations in India like Microsoft, Oracle, Adobe, etc.
Following Quality Standards such as ISO 9000, SEI CMM etc.
English-speaking professionals Cost competitiveness Quality telecommunications infrastructure
Indian time zone (24 x 7 services to the global customers). Time difference between India and America is approximately 12
4
hours, which is beneficial for outsourcing of work.
Opportunities

Threats

High quality IT education market Increasing number of working age people
Lack of data security systems Countries like China and Philippines with qualified workforce making efforts to overcome the English language barrier
India 's well developed soft infrastructure
Upcoming International Players in the market
IT development concentrated in a few cities only
IT Sector - Top Players
S. NO.
1. 2. 3. 4.
Companies
TCS Infosys Wipro HP
5. 6. 7. 8. 9. 10. 11 12 13 14 15 16 17 18
IBM Satyam HCL Patni Polaris Cisco KPIT Cummins Kanbay Microsoft Dell Larsen and Toubro Compare Infobase Accenture i-Flex Solutions
2.1 History
Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven people with US$ 250. The company is engaged in software development in the form of services, turnkey projects and products for the domestic and export market. The software development is targeted towards the distribution, banking, telecommunication and manufacturing sectors worldwide. On April 21st 1992 the name changed to Infosys Technologies Private Limited, and the registered office was moved to Bangalore. In 1993, The Company turned up with ISO 9000 certification.
1976,100 No. of equity shares of Rs 10 each issued, subscribed and paid-up (15,84,000 shares to directors, promoters; 2,68,100 shares to employees of the company and 1,24,000 shares at a prem., of Rs 70 per to shareholders on right basis). On 11th February 1995, the new STP at Electronics City was officially inaugurated. This is the largest, single-location, software development center available in India. During the year BANCS 2000 was installed in Kenya, opening up the export market for the banking product group. Necessary permissions were received for selling up wholly owned subsidiaries in the USA, Europe & Asia-pacific. In 2002, Mr. Nandan Nilekani becomes the new CEO of the company. Mr. Narayana Murthy assumes the role of Chairman and Chief Mentor
Announces a strategic technology partnership with First Bank of Nigeria Plc. (FBN), the largest Bank in West Africa, to deploy Infosys Enterprise Banking e-Platform suite of solutions. In 2005 Aspis Bank, one of the leading medium size retail and commercial banks operating in Greece, signs up for Finacle universal banking solution to power its core banking and treasury operations across 66 branches. In 2006 Infosys & Microsoft Share Vision for Effective Enterprise Information Management and Infosys Implements PeopleSoft Enterprise Applications at Nissan North America.
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In 2007 Infosys to Open Development Center in Mexico, its First in Latin America. Infosys Receives the Highest Score in Strategy in Independent Research Firm's Report on the Applications Outsourcing Market. In 2008 Infosys & Nihon Unisys signs MoU for Strategic Business Deployment & Joint Development for Sales & Solution Service. DSB Bank Partners with Finacle from Infosys for Core Banking-led Transformation. In 2009 Infosys Technologies has bagged a five-year outsourcing and support agreement from BP where Infosys will manage and operate a large portion of business systems for BP under the terms of the agreement. The company has announced successful implementation its first IT enabled end-to-end business transformation program for Thermax.
2.2 What We Do
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 US$ 5.7 billion (LTM Dec-10). 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. Our offerings span business and technology consulting, application services, systems integration, product engineering, engineering, custom testing software development, maintenance, re-
independent
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 65 offices and 59 development centers in India, China, Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its subsidiaries have 127,779 employees as on December 31, 2010. Infosys takes pride in building strategic long-term client relationships. Over 97% of our revenues come from existing customers (FY 10).
2.3 Who We Are

Vision
"To be a globally respected corporation that provides best-of-breed business solutions, leveraging technology, delivered by best-in-class people."
Mission
"To achieve our objectives in an environment of fairness, honesty, and courtesy towards our clients, employees, vendors and society at large."
Values
We believe that the softest pillow is a clear conscience. The values that drive us underscore our commitment to:
Customer Delight: To surpass customer expectations consistently Leadership by Example: To set standards in our business and transactions and be an exemplar for the industry and ourselves Integrity and Transparency: To be ethical, sincere and open in all our transactions Fairness: To be objective and transaction-oriented, and thereby earn trust and respect Pursuit of Excellence: To strive relentlessly, constantly improve ourselves, our teams, our services and products to become the best
2.4 Awards
Infosys has consistently been honored by customers, industry bodies, media and other influencers. The following are among the recognitions we received over the past year:
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Infosys was ranked among the top 50 most respected companies in the world by Reputation Institutes Global Reputation Pulse 2009. We have been voted the Company in The Wall Street Journal Asia 200 every year since 2000. We won Sears Holding Corporations Partners in Progress award for the second consecutive year. We also won HDS' Diamond Award for 'Best Virtualization Strategy' and Platinum Award for 'Best Green Strategy for a Data Center'. Infosys was also listed in the Most Admired Knowledge Enterprises (MAKE) 2008 study and Forbes' Asian Fabulous 50 for the fourth consecutive year. We were ranked among the Best Companies for Leaders' in a survey by Bloomberg Business Week and Hay Group in 2009,'India's Best Companies to Work for - 2009' in a survey by the Great Place to Work Institute and conferred with the NASSCOM gender inclusivity award. Asset magazine acclaimed our Corporate Governance, acknowledging our corporate policies and practices as among the best in the industry.
2.5 Sustainability
Infosys has always adopted a sustainable approach to business. We are aware that growth is inextricably linked to the well being of our ecosystem - employees and business partners, local communities and the environment. As the world gets flatter, we have a larger responsibility to achieve a sustainable tomorrow. Our sustainability policy guides interactions with stakeholders and influences day-to-day actions. As a responsible corporate citizen, we collaborate with customers and governments to develop sustainable solutions and governance frameworks. We engage with the United Nations Global Compact for coordinated action towards sustainable development. Every year, we publish a Sustainability Report based on the guidelines of the Global Reporting Initiative. The reports focus on our activities - business-as-usual as well as beyond business - and share our progress in the pursuit of sustainable growth. The report for 2009-2010 delineates our sustainability agenda in three areas: Social Contract
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We are committed to an equitable society. Our employees make a difference by taking up social causes in healthcare, education, art and culture, rural rehabilitation and inclusive growth. Resource Efficiency
We are responsible consumers of energy and natural resources. Our long-term vision is to become water sustainable. We are reducing our ecological impact even as we grow our global operations. Green Innovation
We develop sustainable solutions to reduce the carbon footprint of our customers. We combine sustainability with engineering to develop smart and green products.
2.6 Fact File

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 33 countries and development centers in India, US, China, Australia, UK, Canada, Japan and many other countries. Infosys has over 122,000 employees of 83 nationalities.
2.7 Management board

Name Ashok Vemuri B G Srinivas Chandra Shekar Kakal Designation Sr. VP - Banking & Capital Markets Sr. VP - Man., Product Engineering Sr. VP - Enterprise Solutions
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David L Boyles Deepak M Satwalekar Jeffrey S Lehman K Dinesh K Dinesh K Parvatheesam K Parvatheesam K V Kamath Marti G Subrahmanyam N R Narayana Murthy Omkar Goswami R Seshasayee S D Shibulal S D Shibulal S Gopalakrishnan S Gopalakrishnan S Gopalakrishnan Sridar A Iyengar Srinath Batni Srinath Batni Subhash B Dhar T V Mohandas Pai T V Mohandas Pai V Balakrishnan
Independent Director Independent Director Independent Director Head - Commu. Design Group & Infor. Systems Director Co. Secretary & Compl. Officer Secretary Independent Director Independent Director Chairman & Chief Mentor Independent Director Additional Director Director & COO Director & COO Managing Director & CEO CEO Managing Director & CEO Independent Director Head - Delivery Excellence Director Sr. VP - Commu., Media & Entertainment Director and Head Director Chief Financial Officer
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3. 1 Consulting services
Best of both worlds: Consulting and Global Delivery The days of flying an entire team of business consultants to a client site, incurring the high costs of travel, and thinking about problems with a local perspective are over. We knew that clients were tired of this old model of consulting. As the pioneer of the Global Delivery Model, we developed a new model for consulting based on a simple idea: A blended offering of high quality business consulting onsite with impeccable technology implementation offsite. Our Service Areas Information and Technology Strategies
We take a practical, business-minded approach to IT, through the following offerings:

IT Diagnostic and Assessment IT Strategy IT Cost Reduction IT Transformation (applications, infrastructure, solution delivery) Merger Integration IT Organizational Development
Product Innovation
We help clients innovate and improve the product lifecycle with:

1.
Co-Creation and Innovation Networks

Ideation Accelerators Concept Labs Launch Centers
2. 3.
Product Effectiveness Analysis PLM-enabled Transformation Next Generation Commerce
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We help clients deliver more value to and derive more value from customers through: Multi-Channel Customer Experience Analysis Customer Data Collection and Use Sales and Marketing Process Redesign
Core Process Excellence
We help clients become more competitive by transforming their core processes with:

Finance, SCM and QTC Package Enabled Transformation (SAP and Oracle) ERP Programs Supply Chain/Procurement Transformation Enterprise Content/Asset Management CFO Services: Finance Transformation and Corporate Performance Management Quote-to-Cash Transformation Learning & Complex Change
We solve the people and organizational problems that often derail projects through:

Customized Organizational Change Management Change Management Integration (communication, culture change, organizational design, leadership development)
Training Program Design, Development and Delivery Human Resources Transformation Human Resources Value Enhancement (blending process and technology improvements with global delivery)
3.2 IT Services
Infosys' IT services leverage our domain and business expertise. We offer IT-enabled business solutions along with a complete range of services.

Application Services Architecture Services Independent Validation and Testing Services

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Information Management Services Infrastructure Services Knowledge Services Learning Services Packaged Application Services SOA Services Systems Integration Services
3.3 Service available for industries

Our business solutions and services help accelerate innovation, increase productivity, reduce costs, and optimize asset utilization.

Aerospace and Defense Airlines Automotive Banking and Capital Markets Communication Services Consumer Packaged Goods Discrete Manufacturing Education Energy Healthcare High Technology Hospitality and Leisure Insurance Life Sciences Logistics and Distribution Manufacturing Publishing Resources Retail
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Studios and Networks Utilities
3.4 Engineering Services

We provide concept-to-market R&D and engineering services to improve your product operations. Our services address the complete engineering value chain spanning various industry verticals.

Lifecycle Management Manufacturing Process and Plant Solutions Product Engineering
3.5 BPO Services

Infosys BPO combines domain expertise, process skills and technology to deliver worldclass process outsourcing. Offerings by Industry

Banking and Capital Markets Communication Service Providers Energy and Utilities Healthcare Insurance Manufacturing Media and Entertainment Retail, CPG and Logistics Services
Offerings by Function

Business Platforms Customer Service Outsourcing Finance and Accounting

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Human Resources Outsourcing Knowledge Services Legal Services Sales and Fulfillment Sourcing and Procurement Outsourcing
3.6 Products and Platforms

Our products and platforms provide a holistic and integrated transformation approach, complete with solutions and services.

Finacle Flypp Infosys iEngage Infosys iProwe Infosys MaskIT Infosys mConnect Infosys Research On Demand Infosys Unified Communications and Collaboration (UC) iTransform Supply Chain Visibility
3.7 Cloud Services

As a Cloud ecosystem integrator, we offer enterprises single point accountability, rapid time-to-value and improved customer experience. Infosys Cloud Services helps you orchestrate and integrate Cloud services with your existing enterprise investments.
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4.1 Meaning of financial statement

A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. In British Englishincluding United Kingdom company lawa financial statement is often referred to as account, although the term financial statement is also used, particularly by accountants. For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include four basic financial statements, accompanied by a management discussion and analysis: 1. Balance sheet: also referred to as statement of financial position or condition, reports on a company's assets, liabilities, and Ownership equity at a given point in time. 2. Income statement: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. Profit & Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. 3. Statement of retained earnings: explains the changes in a company's retained earnings over the reporting period. 4. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities. For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.
4.2 Definition
A written report which quantitatively describes the financial health of a company. This includes an income statement and a balance sheet, and often also includes a cash flow statement. Financial statements are usually compiled on a quarterly and annual basis.
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Summary report that shows how a firm has used the funds entrusted to it by its stockholders (shareholders) and lenders, and what is its current financial position. The three basic are the (1) balance sheet, which shows firm's assets, liabilities, and net worth on a stated date; (2) income statement (also called profit & loss account), which shows how the net income of the firm is arrived at over a stated period, and (3) cash flow statement, which shows the inflows and outflows of cash caused by the
firm's activities during a stated period.
4.3 Analysis of financial statements and its classification

Financial statement analysis is an evaluative method of determining the past, current and projected performance of a company. Several techniques are commonly used as part of financial statement analysis including horizontal analysis, which compares two or more years of financial data in both dollar and percentage form; vertical analysis, where each category of accounts on the balance sheet is shown as a percentage of the total account; and ratio analysis, which calculates statistical relationships between data.
classification of financial analysis
according to material used
according to modulus operandi of analysis
external analysis
internal analysis
horizontal analyisis
vertical analysis
4.4 Techniques of financial analysis

1. Comparative financial statements
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Comparative Financial Statement analysis provides information to assess the direction of change in the business. Financial statements are presented as on a particular date for a particular period. The financial statement Balance Sheet indicates the financial position as at the end of an accounting period and the financial statement Income Statement shows the operating and non-operating results for a period. But financial managers and top management are also interested in knowing whether the business is moving in a favorable or an unfavorable direction. For this purpose, figures of current year have to be compared with those of the previous years. In analyzing this way, comparative financial statements are prepared.
Comparative Financial Statement Analysis is also called as Horizontal analysis. The Comparative Financial Statement provides information about two or more years' figures as well as any increase or decrease from the previous year's figure and it's percentage of increase or decrease. This kind of analysis helps in identifying the major improvements and weaknesses. For example, if net income of a particular year has decreased from its previous year, despite an increase in sales during the year, is a matter of serious concern. Comparative financial statement analysis in such situations helps to find out where costs have increased which has resulted in lower net income than the previous year. 2. Trend analysis Comparison of two or more year's financial data is known as horizontal analysis, or trend analysis. Horizontal analysis is facilitated by showing changes between years in both dollar and percentage form as has been done in the example below. Showing changes in dollar form helps the analyst focus on key factors t hat have affected profitability or financial position. Observe in the example that sales for 2002 were up $4 million over 2001, but that this increase in sales was more than negated by a $4.5million increase in cost of goods sold. Showing changes between years in percentage form helps the analyst to gain perspective and to gain a feel for the significance of the changes that are taking place. For example a $1 million increase in sales is much more significant if the prior year's sales were $2 million than if the prior year's sales were $20 million. In the first situation, the increase would be 50% that is
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undoubtedly a significant increase for any firm. In the second situation, the increase would be 5% that is just a reflection of normal progress. 3. Common size financial statements Vertical analysis is the procedure of preparing and presenting common size statements. Common size statement is one that shows the items appearing on it in percentage form as well as in dollar form. Each item is stated as a percentage of some total of which that item is a part. Key financial changes and trends can be highlighted by the use of common size statements. Common size statements are particularly useful when comparing data from different companies. For example, in one year, Wendy's net income was about $110 million, whereas McDonalds was $1,427 million. This comparison is somewhat misleading because of the dramatically different size of the two companies. To put this in better perspective, the net income figures can be expressed as a percentage of the sales revenues of each company, Since Wendy's sales revenue were $1,746 million and McDonald's were $9,794 million, Wendys net income as a percentage of sales was about 6.3% and McDonald's was about 14.6%. 4. Funds flow analysis Fund flow analysis is the analysis of flow of fund from current asset to fixed asset or current asset to long term liabilities or vice- versa. First of all, we make fund flow statement and then study its cause and effect deeply and try to find many important facts and information which can be used in business. It can also solve following problems: Why are net current assets decreasing after getting high volume of net profit? Why did company not issued high dividend, even company had earned high profit in last year? How did company use the net profit?
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What
are
the
main
sources
of
redemption
of
loan?
5. Cash flow analysis
Cash is the gasoline that makes your business run. Cash flow can be defined as the way money moves into and out of your business; it is the difference between just being able to open a business and being able to stay in business. A cash flow analysis is a method of checking up on your firms financial health. It is the study of the movement of cash through your business, called a cash budget, to determine patterns of how you take in and pay out money. The goal is to maintain sufficient cash for firm operations from month to month. This type of cash flow analysis is called developing the cash budget.
6. Ratio analysis
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
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5.1 Objective
To understand the information contained in the financial statement of the company with the 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.
5.2 Meaning of ratios

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios. Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%. Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, such as earnings yield, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1, such as P/E ratio; these latter are also called multiples.
5.3 Purpose and types of ratios

Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. 1. Liquidity ratios measure the availability of cash to pay debt.

Current ratio Acid test or quick ratio

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Fund flow ratio
2. Leverage or Solvency ratios which show the extent that debt is used in a company's capital structure.

Proprietary ratio Debt equity ratio Fixed assets to capital employed ratio Capital gearing ratio Funded debt to capitalization ratio
3. Turnover ratios measure the firm's ability to repay long-term debt.

Inventory turnover ratio Debtors turnover ratio Creditors turnover ratio Working capital turnover ratio Fixed assets turnover ratio Total asset turnover ratio
4. Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.

Gross profit ratio Operating profit ratio Operating ratio Net profit ratio Expense ratio
5. Valuation ratios measure investor response to owning a company's stock and also the cost of issuing stock.

Price earnings ratio Yield ratio

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Market value to book value ratio
Financial ratios allow for comparisons

between companies between industries between different time periods for one company between a single company and its industry average
Ratios generally hold no meaning unless they are benchmarked against something else, like past performance or another company. Thus, the ratios of firms in different industries, which face different risks, capital requirements, and competition, are usually hard to compare.
5.4 How a Ratio is expressed?

As Percentage - such as 25% or 50% . For example if net profit is Rs.25,000/- and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales. As Proportion - The above figures may be expressed in terms of the relationship
between net profits to sales as 1: 4. As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4th of the sales.
5.5 Classification of Ratios

Balance Sheet Ratio P&L Ratio or Income/Revenue Statement Ratio Balance Sheet and Profit & Loss Ratio
Financial Ratio Current Ratio Quick Asset Ratio
Operating Ratio Gross Profit Ratio Operating Ratio
Composite Ratio Fixed Asset Turnover Ratio, Return on Total Resources Ratio,
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Proprietary Ratio Debt Equity Ratio
Expense Ratio Net profit Ratio Stock Turnover Ratio
Return on Own Funds Ratio, Earning per Share Ratio, Debtors Turnover Ratio,
5.6 Parties interested in ratio analysis

The analysis of financial figures contained in the company's profit and loss account and balance sheet by employing appropriate technique is known a financial statement analysis. Financial statement analysis is useful to different parties to obtain the required information about the organization. Following are the parties interested in financial statement analysis. 1. Shareholders Shareholders are interested in financial statement analysis to know the profitability of the organization. Profitability shows the growth potentiality of an organization and safety of investment of shareholders. 2. Investors and Lenders Investors and lenders are interested to know the solvency position of an organization. They analyze the financial statement position to know about the safety of their investment and ability to pay interest and repayment of principle amount on due date. 3. Creditors Creditors are interested in analyzing the financial statements in order to know the short term liquidity position of an organization. Creditors analyze the financial statement to know either the organization is enable to pay the amount of short term liabilities on due date. 4. Management Management is interested to analyze the financial statement for measuring the effectiveness of its policies and decisions. It analyze the financial statements to know short term and long term solvency position, profitability, liquidity position and return on investment from the business. 5. Government Government is interested to analyze the financial position in determining the amount of tax liability. It also helps for formulating effective plans and policies for economic growth.
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6.1 Liquidity ratios

Current ratio (including loans and advances)
Current ratio is an indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations.
Current ratio = Years Ratios 2007 4.91 2008 3.27 2009 4.82 2010 4.45
current ratio
6 5 4 3 2 1 0 2007 2008 2009 2010
Interpretation
The ideal current ratio is 3:1, which indicates that current assets should triple as compared to the current liabilities. The current ratios (2007-2010) shown below table and chart. From these we can say that Infosys Technologies Ltd has ability to meet their short term obligations.
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In current scenario Infosys has Rs 4.71 to pay Rs1. i.e. it has 370% more capacity to repay its short term loan. Quick ratio
It is an indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.
Quick ratio =
Year Ratios
2007 4.91
2008 3.28
2009 4.67
2010 4.20
quick ratio
6 5 4 3 2 1 0 2007 2008 2009 2010
Interpretation The ideal ratio considered to be 1:1, which means liquid current assets should be equal to the liquid current liabilities. Infosys Technologies Ltd Company has Rs 4.20 of Quick Assets to meet Rs1.00 of its Current Liability. It shows that company has the ability to pay its short term liabilities.
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6.2 Solvency ratios

Proprietary ratio
This ratio relates the shareholder's funds to total assets. Proprietary ratio indicates the longterm or future solvency position of the business. This ratio throws light on the general financial strength of the company. It is also regarded as a test of the soundness of the capital structure. Higher the ratio or the share of shareholders in the total capital of the company better is the long-term solvency position of the company. A low proprietary ratio will include greater risk to the creditors.
Proprietary ratio = Year Ratio (%) 2007 85 2008 78 2009 84 2010 86
proprietary ratio (%)

90 85 80 75 70 2007 2008 2009 2010
Interpretation An ideal ratio is 63%. From above chart and table we can say that Infosys Technologies Ltd has good long term solvency position. Debt to equity ratio
A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the
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company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders.
Debt to equity ratio = Year Ratio 2007 0.16 2008 0.28 2009 0.18 2010 0.17
debt to equity ratio

0.3 0.2 0.1 0 2007 2008 2009 2010
Interpretation Ideally this ratio should be 2:1, which means that debt can be twice as compared to the owned funds. A ratio less than 2:1 will indicate that firm is not taking any risk and is mainly using shareholders funds for financing its requirements. Table and chart above show that during these four years companys debt equity ratio fluctuates between 0.161.28. It means company is self reliable and shareholders getting good returns on their investments.
Fixed assets to capital employed ratio

Capital employed usually means the total assets, fixed as well as current, used in business, while net capital employed refers to total assets minus liabilities.
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Fixed assets to capital employed ratio =
Year Ratio
2007 0.28
2008 0.29
2009 0.25
2010 0.19
FA to capital employed ratio

0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2007 2008 2009 2010
Interpretation An ideal ratio is 0.7:1. If ratio is below that ideal ratio that means capital employed used for operation of the company. So company should use their capital for getting more fixed assets.
6.3. Turnover ratios

Debtors turnover ratio
The result of this ratio gives a rough estimate of average length of time the customers a/c remains outstanding. A lower Ratio indicates ineffective credit policy of the management. A reasonable credit period is given to customers. Year Ratio 2007 4.5 2008 5.81 2009 6.25 2010 6.37
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debtors turnover ratio

8 6 4 2 0 2007 2008 2009 2010
Working capital turnover ratio
A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. Working capital turnover =
Year ratio
2007 1.02
2008 1.04
2009 0.91
2010 0.88
working capital turnover ratio

1.1 1.05 1 0.95 0.9 0.85 0.8 2007 2008 2009 2010
Interpretation In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the
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sales. As it is service oriented company, it does not have any stock kept with it. So the investment required in working capital is less. Fixed assets turnover ratio
This ratio is often used as a measure in manufacturing industries, where major purchases are made for PP&E to help increase output.
Fixed assets turnover ratio = Year Ratio 2007 4.23 2008 3.28 2009 4.59 2010 5.05
FA turnover ratio
6 5 4 3 2 1 0 2007 2008 2009 2010
Interpretation When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was. From below table and chart investment to fixed assets was effective but they should invest more to fixed assets. Total assets turnover ratio
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The lower the total asset turnover ratio, as compared to historical data for the firm and industry data, the more sluggish the firm's sales. Fixed assets, such as plant and equipment, could be sitting idle instead of being used to their full capacity. All of these issues could lower the total asset turnover ratio.
Year Ratio
2007 1.01
2008 0.91
2009 0.96
2010 0.82
total assets turnover ratio

1.2 1 0.8 0.6 0.4 0.2 0 2007 2008 2009 2010
Interpretation From below chart and table that shows company has no problem with inventories, receivables and fixed assets. Companys total assets turnover ratio varies between 0.80- 1.0 which means good.
6.4. Profitability ratio

Gross profit ratio
Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be reduced without incurring losses on operations. It reflects efficiency with which a firm produces its products. There is no standard GP ratio for evaluation. It may vary from business to business. [Gross Profit Ratio = (Gross profit / Net sales) 100]
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Year Ratio (%)
2007 44.64
2008 43.27
2009 45
2010 45.32
GP ratio (%)
45.5 45 44.5 44 43.5 43 42.5 42 2007 2008 2009 2010
Interpretation The gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends. From above data company has very high gross profit for their investments. Company makes Rs 43-Rs 45 on every
Rs1.00 of Sale.
Net profit ratio
NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment. Net Profit Ratio = (Net profit / Net sales) 100 Year Ratio (%) 2007 28.27 2008 28.56 2009 28.71 2010 27.45
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NP ratio (%)
29 28.5 28 27.5 27 26.5 2007 2008 2009 2010
Interpretation If net profit ratio is higher than 20% it means very good. Hence, Infosys Technologies Ltds operation is going very well. According to given data, NP maybe falling down little bit so they need control their costs. Operating profit ratio
The operating profit margin ratio indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. It is expressed as a percentage of sales and shows the efficiency of a company controlling the costs and expenses associated with business operations.
Year Ratio (%)
2007 28.56
2008 28.23
2009 30.65
2010 30.99
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operating profit ratio (%)

29 28.5 28 27.5 27 26.5 2007 2008 2009 2010
Interpretation Phrased more simply, it is the return achieved from standard operations and does not include unique or one time transactions. From below data, Infosys Technologies Ltd has managed their cost of goods very well.
6.5. Other ratios

EPS before exceptional item (%) 2007 53.20 2008 15.36 2009 29.92 2010 (1.26)
Year Ratio
EPS before exceptional item %

60 50 40 30 20 10 0 -10
2007
2008
2009
2010
Return on equity ratio

37
This ratio, also known as return on shareholders funds on proprietors, indicates the percentage of net profit available for equity shareholders to equity shareholders funds. This ratio measures the return only on equity shareholders funds and not on total capital employed. ROE= (NP after interest income tax and preference dividends if any/equity shareholders funds)* 100 Year Ratio 2007 33.89 2008 33.14 2009 32.67
ROE (%)
34 33.5 33 32.5 32 2007 2008 2009
Interpretation From above data, ROE of the company is going down from 33 to 32. And companys productivity of the owned funds employed in the firm is good. ROE has falling so it shows that the company has utilized the shareholders funds less efficiently. It may result in decrease in the confidence of shareholders. Return on capital employed
This ratio indicates the percentage of net profits before interest and tax to total capital employed. ROCE= (net profit before tax and interest/Capital employed)*100
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Year Ratio
2007 37.05
2008 37.81
2009 37.71
ROCE (%)
38 37.8 37.6 37.4 37.2 37 36.8 36.6 2007 2008 2009
Interpretation This ratio is considered as very important if because it reflects the overall efficiency with which capital is used. According to given data, efficiency of utilization of capital employed is good.
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Conclusion
Infosys Technology Ltd is not dependent on external borrowers. There is no interest burden, therefore profit is higher. No burden of loan repayment. Company can get loans in future. It gives lower EPS to shareholders. According to the current ratios of Infosys Technologies Ltd we can say that firm has ability to meet their short term obligations. Infosys Technologies Ltd Company has Rs 4.20 of Quick Assets to meet Rs1.00 of its Current Liability. It shows that company has the ability to pay its short term liabilities. The proprietary ratio of Infosys Technologies Ltd shown us they have good long term solvency position. Four years (2007-2010) companys debt equity ratio fluctuates between 0.16- 1.28. It means company is self reliable and shareholders getting good returns on their investments.
The gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends. From our calculation company has very high gross profit for their investments. Company makes Rs 43-Rs 45 on every Rs1.00 of Sale.
The net profit ratio is higher than 20% it means very good. Hence, Infosys Technologies Ltds operation is going very well. According to given data, NP maybe falling down little bit so they need control their costs.
From our calculation, ROE of the company is going down from 33 to 32. And companys productivity of the owned funds employed in the firm is good. ROE has falling so it shows that the company has utilized the shareholders funds less efficiently. It may result in decrease in the confidence of shareholders.
According to given data, efficiency of utilization of capital employed is good
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RECOMMENDATIONS
1. Company needs to reduce its cost of sales. Because companys operating profit ratio, ROE and ROCE is decreasing in 2009 and 2010. I.e. software development related expenses to increase GP ratio and operating net profit ratio. 2. Company needs to have stringent credit policy to reduce the funds required for working capital. 3. Do efficient utilization of shareholders funds to improve its ROE and ROI to maintain its goodwill investors mind. 4. May go for some debt borrowing to increase reserves and surplus for shareholders.
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Web sites 1. Infosys.com 2. Economictimes.indiatimes.com 3. Moneyrediff.com 4. Naukrihubs.com 5. Economycontrol.com 6. Citehr.com Books

1. 2.
Analysis of financial statements by Dr.N.M Vechalekar Management accounting Dr.Kulkarni
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Appendixes Balance sheet as at SOURCES OF FUNDS SHAREHOLDERS FUNDS Share capital Reserves and surplus 1 2 286 13204 13490 APPLICATION OF FUNDS FIXED ASSETS Original cost Less: Accumulated deprecation Net book value Add: Capital work in progress 3 4508 1837 2671 1260 3931 INVESTMENTS DEFFERED TAX ASSETS CURRENT ASSETS, LOANS AND ADVANCES Sundry debtors Cash and bank balances Loans and advances 6 7 8 3093 6429 2705 12227 LESS: CURRENT LIABILTIES Current liabilities Provisions NET CURRENT ASSETS 9 10 1483 2248 8496 13490 1162 662 7137 11162 2292 5470 1199 8961 4 5 964 99 3889 1739 2150 957 3107 839 79 286 10876 11162 Schedule March 31, 2008 March 31, 2007
43
Balance sheet as at SOURCES OF FUNDS SHAREHOLDERS FUNDS Share capital Reserves and surplus DEFFERED TAX LIABILITIES
Schedule
March 31, 2010
March 31, 2009
1 2
287 21749 232 22036
286 17523 37 17846
APPLICATION OF FUNDS FIXED ASSETS Original cost Less: Accumulated deprecation Net book value Add: Capital work in progress 3 6357 2578 3779 409 4188 INVESTMENTS DEFFERED TAX ASSETS CURRENT ASSETS, LOANS AND ADVANCES Sundry debtors Cash and bank balances Loans and advances 6 7 8 3244 9797 3888 16929 LESS: CURRENT LIABILTIES Current liabilities Provisions NET CURRENT ASSETS 9 10 1763 2035 13131 22268 1507 1798 12288 17846 3390 9039 3164 15593 4 5 4636 313 5986 2187 3799 615 4414 1005 139
44
Profit and loss account
Schedule
March 31, 2008
March 31, 2007
Income from software services and products Software development expenses GROSS PROFIT 11
15648
13149
8876 6772
7278 5881
Selling and marketing expenses General administration expenses
12 13
730 1079 1809
719 927 1649 4225 469 3756
Operating profit before depreciation Depreciation OPERATING PROFIT
4963 546 4417
Other income Provision for investment NET PROFIT BEFORE TAX AND EXCEPTIONAL ITEM Net taxes NET PROFIT AFTER TAX 15 14
663
375
5100
4129
590 4470
352 3777
Balance brought forward Less: Residual dividend paid Dividend tax on the above
4844
2195 4 1
4844 AMOUNT AVAILABLE FOR 9314
2190 5973
APPROPRATION Dividend Interim dividend Final Dividend Total dividend Dividend tax 343 415 1144 1902 323 649 102 278 371
45
Amount transferred to general reserve Amount transferred to capital reserve balance in profit and loss account
447
378
9314
5973
EARNING PER SHARE equity shares of par value Rs 5/- each Before exceptional item basic diluted After exceptional item basic diluted Number of shares basic diluted 57.13.98.340 57.33.06.887 55.68.52.339 56.93.42.694 78.24 77.98 67.82 66.33 78.24 77.98 67.82 66.33
Profit and loss account
Schedule
March 31, 2010
March 31, 2009
Income from software services and products Software development expenses GROSS PROFIT 11
21140
20264
11559 9581
11145 9119
Selling and marketing expenses General administration expenses
12 13
974 1247
933 1280
Operating profit before depreciation Depreciation OPERATING PROFIT
7360 807 6553
6906 694 6212
Other income Provision for investment 14

46
910 (9)
504 2
NET PROFIT BEFORE TAX AND EXCEPTIONAL ITEM Net taxes NET PROFIT AFTER TAX 15
7472
6714
1717 5803 10305
895 5819 6642
Balance brought forward Less: Residual dividend paid Dividend tax on the above 10305 AMOUNT AVAILABLE FOR 16108 6642 12460
APPROPRATION Dividend Interim dividend Final Dividend Total dividend Dividend tax Amount transferred to general reserve Amount transferred to capital reserve balance in profit and loss account 573 861 1434 240 580 48 13806 16108 EARNING PER SHARE equity shares of par value Rs 5/- each Before exceptional item basic diluted After exceptional item basic diluted Number of shares basic diluted 57.33.09.523 57.39.49.631 57.24.90.211 57.34.63.181 101.22 101.10 101.65 101.48 100.37 100.26 101.65 101.48 10305 12460 572 773 1345 228 582
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