INTRODUCTION

Financial analysis:

Financial analysis is the process of evaluating businesses, projects, budgets, and other
finance-related transactions to determine their performance and suitability. Financial
analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable
enough to warrant a monetary investment. Financial analysis is used to evaluate
economic trends, set financial policy, build long-term plans for business activity, and
identify projects or companies for investment. This is done through the synthesis of
financial numbers and data.

Financial analysis can be conducted in both corporate finance and investment finance
settings. External stakeholders use it to reviews the financial statements and
accompanying disclosures of a company to see if it is worthwhile to invest in or lend
money to the entity. This typically involves ratio analysis to see if the organization is
sufficiently liquid and generates a sufficient amount of cash flow. Internal constituents
use financial analysis to analyze a company’s past performance, such as net earnings
or profit margin, into an estimate of the company's future performance.

This type of historical trend analysis is beneficial to identify seasonal trends.

Financial analysis helps to determine if a business will:

• Continue or discontinue its main operation or part of its business.

• Make or purchase certain materials in the manufacture of its product.

• Acquire or rent/lease certain machineries and equipment in the production of

its goods.
• Issue shares or negotiate for a bank loan to increase its working capital.

• Make decisions regarding investing or lending capital.

• Make other decisions that allow management to make an informed selection on

various alternatives in the conduct of its business.

Fundamental analysis and technical analysis are the two main techniques of financial
analysis.

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Fundamental analysis:

Fundamental analysis in finance, is the analysis of a business’s financial statements

usually to analyze the business’s assets, liabilities, and earnings health and competitors
and markets. It also considers the overall state of the economy and factors including
interest rates, production, earnings, employment, GDP, housing, manufacturing and
management. There are two basic approaches that can be used: bottom up analysis and
top down analysis.
The top-down approach starts their analysis with global economics, including both
international and national economic indicators. These may include GDP growth rates,
inflation, interest rates, exchange rates, productivity, and energy prices. They
subsequently narrow their search to regional/ industry analysis of total sales, price
levels, the effects of competing products, foreign competition, and entry or exit from
the industry. Only then do they refine their search to the best business in the area being
studied. The bottom-up approach starts with specific businesses, regardless of their
industry/region, and proceeds in reverse of the top-down approach.

Fundamental analysis includes:

• Economic Analysis: It consists of Economic policy, Economic conditions and

Economic system.
• Industry Analysis: It is based on four stages of an industry in the life cycle.

They are Pioneering stage, Growth stage, Maturity stage and Decline stage.

• Company Analysis: In company analysis different companies are considered

and evaluated from the selected industry so that most attractive company can
be identified. Company analysis is also referred to as security analysis in which
stock picking activity is done. Different analysis have different approaches of
conducting company analysis like 1. Value Approach to Investing 2. Growth
Approach to Investing. Additionally in company analysis, the financial ratios
of the companies are analyzed in order to ascertain the category of stock as
value stock or growth stock. These ratios include price to book ratio and price
earnings ratio. Other ratios like return on equity etc. can also be analyzed to
ascertain the potential company for making investment.

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Fundamental analysis is performed on historical and present data, but with the goal of
making financial forecasts. The purpose of doing fundamental analysis is:

• To conduct a company stock valuation and predict its probable price evolution.
• To make a projection on its business performance.

• To evaluate its management and make internal business decisions and/or to

calculate its credit risk.
• To find out the intrinsic value of the share.

Company analysis:

For analyzing a company qualitative analysis and quantitative analysis is considered.

Qualitative analysis:

Qualitative analysis uses subjective judgment to analyze a company’s value or

prospects based on non-quantifiable information, such as management expertise,
industry cycles, strength of research and development, and labor relations. Qualitative
analysis uses subjective judgment based on “soft” or non-quantifiable data.

Qualitative analysis deals with intangible and inexact information that can be difficult
to collect and measure. Machines struggle to conduct qualitative analysis as intangibles
can’t be defined by numeric values. Understanding people and company cultures are
central to qualitative analysis. Looking at a company through the eyes of a customer
and understanding its competitive advantage assists with qualitative analysis.

Quantitative analysis:

Quantitative analysis is based on quantifiable information. Quantitative analysis allows

you to understand the financial performance of a company through a few numerical
values. You then compare them with performance data of other, similar companies as
well as historical performance of the same company. This helps you ascertain how a
company is performing relative to its peers and its own prior performance, in previous
years.

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Quantitative analysis is generally conducted using financial ratios or earnings
projections. Data for such analysis are taken from the income statement and the balance
sheet – the two basic financial statements of the company. A third important financial
statement – the cash flow statement – is also considered. There are two aspects of
quantitative analysis:

Projected earnings:
As with everything that can be bought, the value of a share to you, the buyer, is equal
to the future benefit you expect to get from it. The benefit you get out of investing in
shares is price appreciation and a periodic dividend the company pays on these shares.

Dividend is a part of the company’s income for a year that it distributes to shareholders
as cash. Therefore, how much dividend you will get in future is directly connected to a
company’s future earnings. Thus, if you can somehow project a company’s future
earnings, you can calculate the price you should be willing to pay for one share of the
company. This process is called earnings projections.

Ratio analysis:

Ratio:

A ratio is one figure expressed in terms of another figure. It is a mathematical

yardstick that measures the relationship between two figures, which are related to
each other and mutually interdependent. Ratio is expressed 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”.
Relationship between two accounting numbers is called Accounting Ratios.
Ratios can be expressed as Pure ratio, Percentage or Rate (times).

Pure: A pure ratio is a simple division of one number by another. The relationship
between current asset & current liabilities is expressed in this way.

Percentage: Certain accounting ratio becomes more meaning full if expressed as a

percentage. The relationship between profit and sales is expressed in this way.

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Rate: Sometimes ratios are expressed as rates i.e. ‘number of times’ over a certain
period. Relationship between stock and sales is expressed in this way.

Ratio analysis:
Ratio analysis is a quantitative method of gaining insight into a company’s liquidity,
operational efficiency, and profitability by studying its financial statements such as the
balance sheet and income statement. Ratio analysis is a cornerstone of fundamental
analysis. Ratio analysis helps us to evaluate the financial health of companies by
scrutinizing past and current financial statements. Comparative data can demonstrate
how a company is performing over time and can be used to estimate likely future
performance. This data can also compare a company’s financial standing with industry
averages while measuring how a company stacks up against others within the same
sector.

Ratios are comparison points for companies. They evaluate stocks within an industry.
Likewise, they measure a company today against its historical numbers. In most cases,
it is also important to understand the variables driving ratios as management has the
flexibility to, at times, alter its strategy to make its stock and company ratios more
attractive. Besides, this method also clarifies the operational drawbacks of an
organization. As a result, the management can take suggestions from the ratio analysis
to take the right course of financial action. Thereby, a company benefits largely from
this widely prominent method.

Ratio analysis can be defined as:

“The systematic use of ratios to interpret the financial statements so that the

strengths and weaknesses of a firm as well as its historical performance and

current financial conditions can be determined.”

Every figure needed to calculate the ratios is found on a company's financial statements
i.e.

1. Balance sheet: The balance sheet is a statement of a company’s assets what

it owns, and liabilities what it owes, at a particular point of time.

2. Profit and loss account / Income statement : The income statement talks
about the company’s revenues, expenses incurred and profit or loss made

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 during a certain period. It helps investors get a sense of the company’s
income from different sources; what expenses it has to undertake in order

to generate this income, and whether the company is earning enough to meet
its financial obligations.

Need and Importance of Ratio Analysis:

1. 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.

2. Budgeting:

Budget is an estimate of future activities on the basis of past experience.

Accounting ratios help to estimate budgeted figures. For example, sales budget
may be prepared with the help of analysis of past sales.

3. 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. In fact, solvency of a firm depends upon the sales revenues generated
by utilizing its assets.

4. Communication:

Ratios are effective means of communication and play a vital role in informing
the position of and progress made by the business concern to the owners or other
parties.
5. Control of performance and cost:

Ratios may also be used for control of performances of the different divisions
or departments of an undertaking as well as control of costs.

6. Inter-firm comparison:

Comparison of performance of two or more firms reveals efficient and

inefficient firms, thereby enabling the inefficient firms to adopt suitable

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 measures for improving their efficiency. The best way of inter-firm comparison
is to compare the relevant ratios of the organization with the average ratios of
the industry.

7. Intra-firm comparison:

The financial performance and position of the firm can be analyzed and
interpreted with in the firm in between the available financial information of
many numbers of years, which portrays either increase or decrease in the
financial performance.

8. 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.

9. 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. It is measured by the leverage/capital structure and profitability ratios
which indicate the earning power and operating efficiency. Ratio analysis
shows the strength and weakness of a firm in this respect.

10. Indication of overall profitability:

The management is always concerned with the overall profitability of the firm.
They want to know whether the firm can meet its short-term as well as long-
term obligations to its creditors, to ensure a reasonable return to its owners and
secure optimum utilization of the assets of the firm. This is possible if all the
ratios are considered together.

11. Signal of corporate sickness:

A company is sick when it fails to generate profit on a continuous basis and
suffers a severe liquidity crisis. Proper ratio analysis can give signal of
corporate sickness in advance so that timely measures can be taken to prevent
the occurrence of such sickness.

12. Aid to decision making:

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 Ratio analysis helps to take decisions like whether to supply goods on credit to
a firm, whether bank loans will be made available etc.

13. Simplification of financial statements:

Ratio analysis makes it easy to grasp the relationship between various items and
helps in understanding the financial statements.

Drawbacks of Ratio Analysis:

1. Limitations of financial statements:

Ratios are calculated from the information recorded in the financial

statements. But financial statements suffer from a number of limitations and
may, therefore, affect the quality of ratio analysis.
2. Historical information:

All of the information used in ratio analysis is derived from actual historical
results. This does not mean that the same results will carry forward into the
future. However, you can use ratio analysis on pro forma information and
compare it to historical results for consistency.

3. Different accounting policies:

Different accounting policies regarding valuation of inventories, charging

depreciation etc. make the accounting data and accounting ratios of two firms
non-comparable.

4. Lack of standard of comparison:

No fixed standards can be laid down for ideal ratios. For example, current ratio
is said to be ideal if current assets are twice the current liabilities. But this
conclusion may not be justifiable in case of those concerns which have adequate
arrangements with their bankers for providing funds when they require, it may
be perfectly ideal if current assets are equal to or slightly more than current
liabilities.

5. Quantitative analysis:

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 Ratios are tools of quantitative analysis only and qualitative factors are ignored
while computing the ratios. For example, a high current ratio may not
necessarily mean sound liquid position when current assets include a large
inventory consisting of mostly obsolete items.

6. Window Dressing:

The term ‘window-dressing’ means presenting the financial statements in such

a way to show a better position than what it actually is. If, for instance, low rate
of depreciation is charged, an item of revenue expense is treated as capital
expenditure etc. the position of the concern may be made to appear in the
balance sheet much better than what it is. Ratios computed from such balance
sheet cannot be used for scanning the financial position of the business.

7. Changes in price level:

Fixed assets show the position statement at cost only. Hence, it does not reflect
the changes in price level. Thus, it makes comparison difficult.

8. Ratios account for one variable:

Since ratios account for only one variable, they cannot always give correct
picture since several other variables such Government policy, economic
conditions, availability of resources etc. should be kept in mind while
interpreting ratios.

9. Seasonal factors affect financial data:

Proper care must be taken when interpreting accounting ratios calculated for
seasonal business. For example, an umbrella company maintains high inventory
during rainy season and for the rest of year its inventory level becomes 25% of
the seasonal inventory level. Hence, liquidity ratios and inventory turnover ratio
will give biased picture.

10. Inflationary effects:

Financial statements are released periodically and, therefore, there are time
differences between each release. If inflation has occurred in between periods,
then real prices are not reflected in the financial statements. Thus, the numbers
across different periods are not comparable until they are adjusted for inflation.

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Classification of ratios
Classification of Ratios Ratios

Balance sheet ratios

On the basis of Origin of Accounting Information Profit and loss ratios

Mixed / Composite ratios

On the basis of functions Liquidity ratios

Profitability ratios

Turnover ratios

Long term solvency ratios

Leverages

Coverage ratios

Market Prospect ratios

On the basis of importance Primary ratios

Secondary ratios

On the basis of users Ratios for Short term creditors

Ratios for Shareholders

Ratios for Management

Ratios for Long term creditors.

About Tata consultancy services (TCS):

Vision:

To decouple business growth and ecological footprint for its operation to address the
environment bottom line. To grow sustainably and help our customer achieve
sustainable growth through our green solutions and service offerings.

Mission:

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To help customer achieve their business objectives by providing innovative, best in
class consulting, IT solutions and services. To make it a joy for all stakeholders to
work with us.

Values:

Integrity, leading change, excellence, respect for the individual and fostering an
environment of learning and sharing.

TCS was established in 1968 and became an independent entity in 1995. Within India,
TCS is well-known in eGovernance, banking financial services, telecommunications,
education and healthcare markets. Tata consultancy services (TCS) is an Indian
multinational information technology (IT) services and consulting company
headquartered in Mumbai, Maharashtra, India with its largest campus located in
Chennai, Tamilnadu,India. TCS is the largest IT services company in the world by
market capitalization ($200 billion). It is a subsidiary of the Tata Group and operates
in 149 locations across 46 countries. TCS is the second largest Indian company by
market capitalization and is among the most valuable IT services brands worldwide. As
of March 2021, TCS had a total of 50 subsidiary Companies and operated in 46
countries. TCS geographic footprint consists of North America, Latin America, The
United Kingdom, Continental Europe, Asia-Pacific, India, Middle East and Africa.

TCS offers a consulting-led, cognitive-powered, integrated portfolio of business,

technology, and engineering services and solutions. This is delivered through its unique
Location Independent Agile™ delivery model, recognized as a benchmark of
excellence in software development. A part of the Tata group, India’s largest
multinational business group, TCS has over 488,000 of the world’s best-trained
consultants in 46 countries. The company is listed on the BSE (formerly Bombay Stock
Exchange) and the NSE (National Stock Exchange) in India. TCS proactive stance on
climate change and award-winning work with communities across the world have
earned it a place in leading sustainability indices such as the MSCI Global
Sustainability Index and the FTSE4Good Emerging Index.

Products Platforms and services offered by TCS:

PRODUCTS: TCS BaNCS, CHROMA, TCS Connected Intelligence Platform, TCS

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Customer Intelligence & Insights, ignio, TCS Intelligent Urban Exchange, TCS iON,
Jile, TCS MasterCraft, TCS OmniStore, TCS Optumera, Quartz – The Smart Ledgers,
TAP.

PLATFORMS: TCS ADD, TCS BFSI Platforms, ERP on Cloud, TCS HOBS.

SERVICES: Analytics and Insights, Automation & AI, Blockchain, Cloud, Cognitive

Business Operations, Consulting, Cyber Security, Enterprise Applications, IOT &

Digital Engineering, Quality Engineering, TCS Interactive, Sustainability Services.

RESEARCH DESIGN

A research design is a framework or blueprint for conducting the marketing research

project. It details the procedures necessary for obtaining the information needed to
structure or solve marketing research problems. In simple words it is the general plan of
how you will go about your research.

• Title of the study

The present study titled as ‘A PROJECT REPORT ON RATIO ANALYSIS OF A

COMPANY’. The study is made with special reference to the ratio analysis and it’s
types, advantages, limitations, analysis and interpretations.

• Objectives of the study

The following are the objectives of present study :

1. To study different ratio used in Tata consultancy services Ltd ( TCS ).
2. To study and analyze the financial performance of the company through ratio
analysis.
3. To know the liquidity, solvency, profitability position of the company.
4. To study the practical understanding of ratios in company.
5. To know the past and present performance of Tata consultancy services Ltd for
intra-firm comparison.

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 • Data and methodology

For the purpose of study of ratio analysis only secondary data is used. Secondary data
is collected from textbook, reference book, annual reports of company (last

6yrs) and company’s websites.

• Scope of study

The scope of study of ratio analysis project is limited to collecting financial data
published in annual report of the company every year. The present study carried out for
6 years ( 2017 – 2023 ).

• Limitations of the study

The following are the limitations of study:
1. The study was limited to only 6 years financial data.
2. The study is purely based on secondary data which were taken primarily from
published annual report of Tata consultancy services Ltd.
3. The study is limited to few ratios because of non-availability of detailed
financial data.

4. The ratio is calculated from past financial statement, and these are not
indications of future.
5. The short span of time is also one of the limitations.

• Chapter layout

The present study is arranged as follows

1. Chapter 1: Introduction gives the brief introduction of ratio analysis.
2. Chapter 2: Part 1 deals with research design and Part 2 deals with profile of
company.
3. Chapter 3: This chapter concerned with theoretical review of ratio analysis.
4. Chapter 4: This chapter concerned with data analysis and interpretation.
5. Chapter 5: Summarizes the results of ratio analysis of company.

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 THEORETICAL VIEW

Classification of Ratios:

On the Basis of Origin of Accounting Information:

1. Balance sheet ratios:

Balance sheet ratios are those ratios the components of which are taken from.
Balance sheet values/figures as appeared in a published annual statement of a
Firm, i.e., Assets and liabilities. Practically, these ratios measure the
relationship.
Between various assets and liabilities and present very useful information to the
Users of financial statement.
Some of the important balance sheet ratios are: Current ratio, Liquid ratio,
Proprietary ratio, Debt – Equity ratio, Capital gearing ratio, etc.

2. Profit and loss ratios / Revenue statement ratios:

Revenue statement ratios are those the components of which are taken from
Profit and loss account/revenue statement appeared in a published annual
Statement. These ratios measure the relationship between the operating
expenses and operating incomes. That is why it is also called operational ratios.

These ratios also present very useful information about the profit-abilities and
otherwise of the enterprise. Some of the important profit and loss ratio are Gross
profit ratio, Net profit ratio, Operating ratio, Operating profit ratio, Expenses
ratio, etc.

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 3. Composite ratios / Mixed ratios :
Composite ratios are those the components of which are taken from revenue
Statement and balance sheet. In other words, one variable is taken from values
Of revenue statement and the other from the balance sheet. They also supply
Significant information to the users of financial statements. These ratios
measure the relationship between the operating expenses and the
assets/liabilities of a firm.
Some of the important ratios are: Inventory turnover ratio, Accounts
Receivables turnover ratio, Accounts Payable turnover ratio, Return on Capital
employed, Return on Equity.

Origin of Ratios
Accounting
Information

Balance sheet Current ratio, Liquid ratio, Proprietary ratio, Debt- Equity ratio,
ratios Capital gearing ratio, etc.

Profit and loss Gross profit ratio, Net profit ratio, Operating ratio, Operating
ratios profit ratio, Expenses ratio, etc.

Mixed ratios Inventory turnover ratio, Accounts Receivables turnover ratio,

Accounts Payable turnover ratio, Return on capital employed,
Return on equity, etc.

On the basis of functions :

1. Liquidity ratios / Short term solvency ratios :

Liquidity ratios quantitatively measure the adequacy of current and liquid assets
And help evaluate the ability of a business to meet its short-term debts. The
Ability of a business entity to pay its short-term debts is frequently referred to
as Short-term solvency position or liquidity position of the entity.

Generally, a business with sufficient current and liquid assets to pay its current
Liabilities as and when they become due is considered to have a strong liquidity
Position and a businesses with insufficient current and liquid assets is
Considered to have a weak liquidity position.

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 Short-term creditors like suppliers of goods and commercial banks use liquidity
Ratios to know whether or not the business has adequate current and liquid
assets To meet its current obligations. Financial institutions hesitate to offer
short-term Loans to businesses with weak short-term solvency position. Some
of the important liquidity ratios are: Current ratio or Working Capital ratio,
Quick ratio or Acid Test ratio, Inventory to Working Capital ratio.

2. Profitability ratios:
Generating profit for the owners is the primary objective to operate commercial
Entities. Regardless of size and industry, a business entity needs a consistent
Improvement in its profit making ability to survive and prosper. A business that
Continually suffers loss cannot survive for a longer period of time.

Profitability ratios measure the efficiency of management in the employment of

Business resources to earn profits and indicate the success or failure of a
Business enterprise for a particular period of time. Almost all the parties
Connected with the business use these ratios as per their analysis needs.
A strong profitability position ensures common stockholders a higher and
timely Dividend income and a future appreciation in the value of shares they
hold. It Ensures creditors prompt a payment for the goods and services delivered
to the Entity. The stakeholders like banks and other financial institutions that
provide Loan can expect a timely repayment of principal amount and interest
earned Thereon if the entity exhibits a well performance in profitability.
Some of the important profitability ratios are: Net profit ratio, Gross Profit ratio,
Operating ratio, Operating profit ratio, Expenses ratio, Return on Capital
Employed ratio, Return on Equity.

3. Activity ratios / Turnover ratios:

Activity ratios (also known as turnover ratios) measure the efficiency of a firm
Or company in generating revenues by converting its production into cash or
Sales. A fast conversion generally increases both revenues and profits. Activity
Ratios show how frequently the assets are converted into cash or sales and are,
Therefore, frequently used in conjunction with liquidity ratios for a deep
analysis of entities liquidity status. Some of the Important activity ratios are
Inventory turnover ratio, Average holding period, Accounts Receivables

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 turnover ratio, Average Collection period, Accounts Payable turnover ratio,
Average Payment period, Assets turnover ratio, Working capital turnover ratio,
etc.

4. Long term solvency ratios:

Solvency ratios (also known as long-term solvency ratios) measure the ability
of a business to survive for a longer period of time. These ratios are very
Important to win the trust stockholders and creditors.
Solvency ratios are normally used to Analyze the capital structure of the entity.
Evaluate the ability of the entity to pay interest on its long-term borrowings.
Evaluate the ability of the company to repay the principal amount of the long-
Term loans obtained from any source. These include debentures, bonds,
medium and long term loans taken from financial institutions etc. Evaluate
whether the Internal equities (i.e., stockholders’ funds) and external equities

(i.e., creditors’ Funds) are in right proportion.

Some of the important long term solvency ratios are Debt to Equity ratio,
Structure ratio, Proprietary ratio, Capital gearing ratio, etc.

5. Leverage :

According to J. C. Van Home: “Leverage is the employment of an asset or

Funds for which the firm pays a fixed cost of fixed return.”
The term ‘leverage’ is used to describe the ability of a firm to use fixed cost
Assets or funds to increase the return to its equity shareholders. In other words,
Leverage is the employment of fixed assets or funds for which a firm has to
meet Fixed costs or fixed rate of interest obligation irrespective of the level of
Activities attained, or the level of operating profit earned.
Leverage occurs in varying degrees. The higher the degree of leverage, the
Higher is the risk involved in meeting fixed payment obligations i.e., operating
Fixed costs and costs of debt capital. But, at the same time, higher risk profile
Increases the possibility of higher rate of return to the shareholders. There are
Three important leverages: Financial Leverage, Operating Leverage, Mixed
Leverage.

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 6. Coverage ratios:

Coverage ratios measure a business’ ability to service its debts and other
Obligations. Analysts can use the coverage ratios across several reporting

Periods to draw a trend that predicts the company’s financial position in the
Future. A higher coverage ratio means that a business can service its debts and
Associated obligations with greater ease. Some of the important coverage ratios
Are: Interest Coverage ratio, EBITDA Coverage ratio, etc.

7. Market Prospect ratios :

Market prospect ratios help investors to predict how much they will earn from
Specific investments. The earnings can be in the form of higher stock value or
Future dividends. Investors can use current earnings and dividends to help
determine the probable future stock price and the dividends they may expect to
Earn.
Some of the important market prospect ratios are: Price to earnings (P/E) ratio,
Earnings per share, Dividend Yield ratio, Dividend Payout ratio, Book value per
share, Price to Book ratio, etc.
Functions Ratios

Liquidity/Short Current ratio , Quick ratio, Inventory to working capital ratio,

term etc.

Solvency ratios

Profitability Net profit ratio, Gross profit ratio, Operating ratio, Operating
ratios profit ratio, Expenses ratio, Return on Capital Employed ratio,
Return on Equity, etc.

Activity / Inventory turnover ratio, Average holding period, Accounts

Turnover ratios Receivables turnover ratio, Average Collection period,
Accounts Payable turnover ratio, Average Payment period,
Assets turnover ratio, Working Capital turnover ratio, etc.

Long term Debt to Equity ratio, Structure ratio, Proprietary ratio, Capital
solvency ratios gearing ratio, etc.

Leverage Financial Leverage, Operating Leverage, Mixed Leverage.

Coverage ratios Interest Coverage ratio, EBITDA coverage ratio, etc.

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 Market Prospect Price to Earnings ratio, Earnings per share, Dividend Yield
ratios ratio, Dividend Payout ratio, Book value per share, Price to
Book ratio, etc.

On the basis of importance :

On the basis of importance or significance, the financial ratios are classified as primary
ratios and secondary ratios. The most important ratios for an undertaking are called its
primary ratios and less important ratios are called secondary ratios. Secondary ratios
are usually used to further explain the outcomes or results generated by primary ratios.

The importance of a ratio mainly depends on two factors the core purpose of
establishing an entity and the analyst’s need of analysis. For example, the return on
capital employed ratio and net profit ratio are the primary ratios for a commercial
undertaking because the basic purpose of these undertakings is to earn profit. Similarly,
if the purpose is to test the liquidity of a business, then the liquidity ratios like current
ratio and quick ratio would be among the most significant ratios for the analyst.

The importance of ratios also significantly varies among industries. Different industries
have different set of primary and secondary ratios. A ratio that is of primary importance
in one industry may be of secondary importance in another industry. Classification of
ratios on the basis of importance or significance is much useful for inter-firm
comparisons.

Based on functions:

Liquidity / Short term solvency ratios:

Current ratio or Working Capital ratio:

Meaning: Current ratio is a liquidity ratio that measures a company’s ability to pay
short-term obligations or those due within one year. It tells how a company can
maximize the current assets on its balance sheet to satisfy its current debt and other
payables. A current ratio that is in line with the industry average or slightly higher is
generally considered acceptable. Similarly, if a company has a very high current ratio

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compared with its peer group, it indicates that management may not be using its assets
efficiently. Current ratio is expressed as Pure ratio.

Components: Current Assets include: Sundry Debtors, Income accrued due but not
paid, Bills Receivables, Pre-payments, Cash and Bank Balance, Marketable
Investments, short term loans and advances given etc. Current Liabilities includes
Sundry Creditors, Bills Payable, Outstanding expenses, Unpaid Dividends, Provision
for Taxation, Income Received in Advance, Bank Overdraft, short term loan etc.

Formula: Current Ratio = Current Assets / Current Liabilities.

Quick ratio or Acid Test ratio :

Meaning: The quick ratio is an indicator of a company’s short-term liquidity position

and measures a company’s ability to meet its short-term obligations with its most liquid
assets. Since it indicates the company’s ability to instantly use its near-cash assets
(assets that can be converted quickly to cash) to pay down its current liabilities, it is
also called the acid test ratio. The quick ratio measures the amount of liquid assets
available against the amount of current liabilities of a company. Liquid assets are those
current assets that can be quickly converted into cash with minimal impact on the price
received in the open market, while current liabilities are a company's debts or
obligations that are due to be paid to creditors within one year.

A result of 1 is considered to be the normal quick ratio. It indicates that the company is
fully equipped with exactly enough assets to be instantly liquidated to pay off its current
liabilities. A company that has a quick ratio of less than 1 may not be able to fully pay
off its current liabilities in the short term, while a company having a quick ratio higher
than 1 can instantly get rid of its current liabilities. Quick ratio is expressed as Pure
ratio.

Components: Quick assets include: Sundry Debtors, Income accrued due but not paid,
Bills Receivable, Cash and Bank Balance, Marketable Investments. Current Liabilities
includes: Sundry Creditors, Bills Payable, Outstanding expenses, Unpaid Dividends,
Provision for Taxation, Income Received in Advance, Bank Overdraft, short term loan
etc.

Formula: Quick ratio = Quick Assets / Current Liabilities.

20
Inventory to Working Capital ratio:

Meaning: Inventory to working capital is a liquidity ratio that measures the amount of
working capital that is tied up in inventory. The difference between total current assets
and total current liabilities is known as working capital or net working capital. Working
capital is the funds that keep the business running daily. The inventory to working
capital ratio allows investors to calculate the exact portion of the business’s working
capital that is tied up in its inventories. Simply put, inventory to working capital ratio
measures the percentage of the company’s net working capital that is financed by its
inventory. This ratio is usually interpreted in terms of percentage.

Components: Inventory means closing stock. Working Capital is difference between

Total Current Assets and Current Liabilities.

Formula: Inventory to Working Capital = Inventory x 100 / Working Capital.

Liquidity ratios Formula

Current ratio Current Assets / Current Liabilities

Quick ratio Quick Assets / Current Liabilities

Inventory to working Inventory x 100 / Working Capital.

Capital ratio

Profitability ratios:

Net Profit ratio:

Meaning: The net profit ratio measures how much net income or profit is generated as
a percentage of revenue. It is the ratio of net profits to revenues for a company or
business segment. Net profit ratio is typically expressed as a percentage but can also be
represented in decimal form. The net profit ratio illustrates how much percentage of
sales/revenue is translated in to net profit. By tracking increases and decreases in its net
profit ratio, a company can assess whether current practices are working and forecast
profits based on revenues. Because companies express net profit ratio as a percentage
rather than an amount, it is possible to compare the profitability of two or more
businesses regardless of size. This metric includes all factors in a company's operations,
including: Total revenue, All outgoing cash flow, Additional income streams, COGS

21
and other operational expenses, Debt payments including interest paid, Investment
income and income from secondary operations and One-time payments for unusual
events such as lawsuits and taxes.

Components : Net profit = Net sales + Non operating income - COGS - Operating

expenses – Non operating expenses – tax. Net sales = Gross sales – Sale returns.

Formula: Net Profit ratio = Net Profit x 100 / Net Sales

Gross Profit ratio:

Meaning: Gross profit ratio is a metric analysts use to assess a company's financial
health by calculating the amount of money left over from product sales after subtracting
the cost of goods sold (COGS). Sometimes referred to as the gross profit margin, gross
profit ratio is expressed as a percentage of sales. The gross profit ratio shows the amount
of profit made before deducting selling, general, and administrative costs. A company's
gross profit ratio percentage is calculated by first subtracting the cost of goods sold
(COGS) from the net sales (gross revenues minus returns, allowances, and discounts).
This figure is then divided by net sales, to calculate the gross profit ratio in percentage
terms.

Components: Cost of goods sold = Opening Stock + Purchase – Closing Stock. Net
sales = Gross sales – Sale returns.

Formula: Gross Profit ratio = Gross Profit (Net Sales – COGS) x 100 / Net Sales

Operating ratio:

Meaning: The operating ratio shows the efficiency of a company's management by

comparing the total operating expense (OPEX) of a company to net sales. The operating
ratio shows how efficient a company's management is at keeping costs low while
generating revenue or sales. The smaller the ratio, the more efficient the company is at
generating revenue vs. total expenses. The operating ratio shows the efficiency of a
company's management by comparing the total operating expense of a company to net
sales. An operating ratio that is decreasing is viewed as a positive sign, as it indicates
that operating expenses are becoming an increasingly smaller percentage of net sales.

22
A limitation of the operating ratio is that it doesn't include debt. An operating expense
is an expense a business incurs through its normal business operations. Operating ratio
is expressed in Percentage form. Operating ratio is Calculated by dividing Operating
expenses to net sales,

Components: Operating Expenses = COGS + Factory expenses + Office and

Administrative expenses + Selling and distribution expenses + Depreciation and
Amortization. Net sales = Gross sales – Sale returns.

Formula: Operating ratio = Operating expenses x 100 / Net sales.

Operating Profit ratio :

Meaning: The operating profit ratio measures how much profit a company makes on
sales after paying for variable costs of production, such as wages and raw materials,
but before paying interest or tax. It is calculated by dividing a company’s operating
income by its net sales. Higher ratios are generally better, illustrating the company is
efficient in its operations and is good at turning sales into profits. It is expressed on a
per-sale basis after accounting for variable costs but before paying any interest or taxes
(EBIT). A company’s operating profit ratio, sometimes referred to as return on sales
(ROS), is a good indicator of how well it is being managed and how efficient it is at
generating profits from sales. It shows the proportion of revenues that are available to
cover non-operating costs, such as paying interest, which is why investors and lenders
pay close attention to it. To calculate the operating profit ratio, divide operating profit
(earnings) by Net sales (revenues).

Components: Operating profit = Net sales - COGS - Factory expenses - Office and
Administrative expenses - Selling and distribution expenses - Depreciation and
Amortization. Or Operating profit = Net Profit + Non operating Expense - Non
operating income. Net sales = Gross sales – Sale returns.

Formula: Operating Profit ratio = Operating Profit x 100 / Net sales.

Return on Capital Employed ratio (ROCE):

23
Meaning: Return on capital employed (ROCE) is a financial ratio that can be used to
assess a company's profitability and capital efficiency. In other words, this ratio can
help to understand how well a company is generating profits from its capital as it is put
to use. Return on capital employed is similar to return on invested capital (ROIC).
Return on capital employed considers both Equity and Debt. ROCE can be calculated
by dividing EBIT to Capital Employed it is expressed in Percentage.

Components: EBIT(Earnings before Interest and taxes) shows how much a company
earns from its operations alone without interest on debt or taxes. EBIT = Net profit +
Interest + Tax. Capital Employed = Total Assets( Excluding Fictitious assets and P/L
Debit balance ) – current Liabilities Or Capital Employed = Equity capital + Preference
Capital + Non current assets – Fictitious assets – P/L Debit balance.

Formula: ROCE = EBIT x 100 / Capital Employed.

Return on Equity (ROE):

Meaning: Return on equity (ROE) is a measure of financial performance calculated

by dividing Net profit available to equity to shareholders by equity capital. Because
shareholders' equity is equal to a company’s assets minus its debt, ROE is considered
the return on net assets. ROE is considered a gauge of a corporation's profitability and
how efficient it is in generating profits. ROE is expressed as a percentage and can be
calculated for any company.

Components: Equity capital = Equity + Reserve and surplus – Fictitious assets – P/L
Debit balance Net profit available to equity shareholders = Net profit after tax -
Preference Dividend - Transfer to reserve .

Formula: ROE=Net profit available to equity shareholders x 100/Equity capital

Profitability ratios Formula

Net Profit ratio Net Profit x 100 / Net sales

Gross Profit ratio Gross profit x 100 / Net sales

Operating ratio Operating Expenses x 100 / Net sales

24
 Operating Profit ratio Operating profit x 100 / Net sales

Return on Capital EBIT x 100 / Capital Employed

Employed

Return on Equity Earnings available to equity shareholders x 100 / Equity

Share capital

Activity / Turnover ratios :

Inventory Turnover ratio:

Meaning: Inventory turnover is a financial ratio showing how many times a company
has sold and replaced inventory during a given period. A company can then divide the
days in the period by the inventory turnover formula to calculate the days it takes to
sell the inventory on hand. Calculating inventory turnover can help businesses make
better decisions on pricing, manufacturing, marketing, and purchasing new inventory.
Inventory turnover measures how fast a company sells inventory. A low turnover
implies weak sales and possibly excess inventory, also known as overstocking. A high
ratio, on the other hand, implies either strong sales or insufficient inventory. The former
is desirable while the latter could lead to lost business. Sometimes a low inventory
turnover rate is a good thing, such as when prices are expected to rise (inventory pre-
positioned to meet fast-rising demand) or when shortages are anticipated. The longer
an item is held, the higher its holding cost will be, and the fewer reasons consumers
will have to return to the shop for new items. Inventory turnover is an especially
important piece of data for maximizing efficiency in the sale of perishable and other
time-sensitive goods. Some examples could be milk, eggs, produce, fast fashion,
automobiles, and periodicals. Inventory Turnover ratio is expressed in times.

Components: Average inventory = Opening Inventory + Closing Inventory / 2. Cost

of goods sold = Opening Stock + Purchase – Closing Stock.

Formula:

Inventory Turnover ratio = COGS / Average Inventory

Inventory holding period = 12 months or 365 days / Inventory Turnover ratio.

25
Accounts Receivables Turnover ratio:

Meaning: The receivables turnover ratio is an accounting measure used to quantify a

company's effectiveness in collecting its accounts receivable, or the money owed by
customers or clients. This ratio measures how well a company uses and manages the
credit it extends to customers and how quickly that short-term debt is collected. It is
useful to compare a firm's ratio with that of its peers in the same industry to gauge
whether it is on par with its competitors. A high receivables turnover ratio may indicate
that a company’s collection of accounts receivable is efficient and that the company
has a high proportion of quality customers that pay their debts quickly. A low
receivables turnover ratio could be the result of inefficient collection, inadequate credit
policies, or customers who are not financially viable or creditworthy.

Companies that maintain accounts receivables are indirectly extending interest-free

loans to their clients since accounts receivable is money owed without interest. If a
company generates a sale to a client, it could extend terms of 30 or 60 days, meaning
the client has 30 to 60 days to pay for the product. The receivables turnover ratio
measures the efficiency with which a company collects on its receivables or the credit
it extends to customers. The ratio also measures how many times a company's
receivables are converted to cash in a period. The receivables turnover ratio is
calculated on an annual, quarterly, or monthly basis. For investors, it's important to
compare the accounts receivable turnover of multiple companies within the same
industry to get a sense of the normal or average turnover ratio for that sector. If one
company has a much higher receivables turnover ratio than the other, it may be a safer
investment. Receivables Turnover ratio is expressed in times.

Components: Average Receivables = Average Debtors (Opening + Closing / 2 ) +

Average Bill receivable (Opening + Closing / 2). Net Credit sales = Gross sales – Sales
Return – Cash sales.

Formula:

Accounts Receivables turnover ratio = Net Credit sales / Average Receivables.

Collection period = 12 months or 365 days / Receivables turnover ratio.

26
Accounts Payable Turnover ratio :

Meaning: The accounts payable turnover ratio is a short-term liquidity measure used
to quantify the rate at which a company pays off its suppliers. Accounts payable
turnover shows how many times a company pays off its accounts payable during a
period. Accounts payable are short-term debt that a company owes to its suppliers and
creditors. The accounts payable turnover ratio shows how efficient a company is at
paying its suppliers and short-term debts. The accounts payable turnover ratio shows
investors how many times per period a company pays its accounts payable. In other
words, the ratio measures the speed at which a company pays its suppliers. Accounts
payable is listed on the balance sheet under current liabilities. Creditors can use the
ratio to measure whether to extend a line of credit to the company.

A decreasing turnover ratio indicates that a company is taking longer to pay off its
suppliers than in previous periods. The rate at which a company pays its debts could
provide an indication of the company's financial condition. A decreasing ratio could
signal that a company is in financial distress. Alternatively, a decreasing ratio could
also mean the company has negotiated different payment arrangements with its
suppliers. When the turnover ratio is increasing, the company is paying off suppliers at
a faster rate than in previous periods. An increasing ratio means the company has plenty
of cash available to pay off its short-term debt in a timely manner. As a result, an
increasing accounts payable turnover ratio could be an indication that the company
managing its debts and cash flow effectively.

Components: Accounts Payable Turnover ratio is expressed in times. Average

Payable = Average Creditors (Opening + Closing / 2 ) + Average Bills Payable (
Opening + Closing / 2 ). Net Credit Purchase = Gross Purchase – Purchase Return -
Cash Purchase.

Formula:

Accounts Payable Turnover ratio = Net Credit Purchase / Average Payable

Payment Period = 12 months or 365 Days / Payable Turnover ratio.

Assets Turnover ratio:

27
Meaning: The asset turnover ratio measures the value of a company's sales or revenues
relative to the value of its assets. The asset turnover ratio can be used as an indicator of
the efficiency with which a company is using its assets to generate revenue. The higher
the asset turnover ratio, the more efficient a company is at generating revenue from its
assets. Conversely, if a company has a low asset turnover ratio, it indicates it is not
efficiently using its assets to generate sales. The higher the asset turnover ratio, the
better the company is performing, since higher ratios imply that the company is
generating more revenue per use of assets. Since this ratio can vary widely from one
industry to the next, comparing the asset turnover ratios of a retail company and a
telecommunications company would not be very productive. Comparisons are only
meaningful when they are made for different companies within the same sector. Asset
Turnover ratio is expressed in times.

Components: Average Assets = Opening + Closing / 2. Net sales = Gross sales – Sale
returns.

Formula: Assets Turnover ratio = Net sales / Average Assets.

Working Capital Turnover ratio:

Meaning: Working capital turnover is a ratio that measures how efficiently a company
is using its working capital to support sales and growth. Also known as net sales to
working capital, working capital turnover measures the relationship between the funds
used to finance a company's operations and the revenues a company generates to
continue operations and turn a profit. A high turnover ratio shows that management is
being very efficient in using a company’s short-term assets and liabilities for supporting
sales. In other words, it is generating a higher dollar amount of sales for every working
capital used. In contrast, a low ratio may indicate that a business is investing in too
many accounts receivable and inventory to support its sales, which could lead to an
excessive amount of bad debts or obsolete inventory. Working Capital Turnover ratio
is expressed in times.

Components: Average Working Capital = Average Current Assets (Opening + Closing

/ 2 ) – Average Current Liabilities ( Opening + Closing / 2 ). Net sales = Gross sales –
Sale returns.

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Formula:

Working Capital Turnover ratio = Net sales / Average Working Capital.

Activity/Turnover ratios Formula

Inventory Turnover ratio COGS / Average Inventory

Average holding period 12 months or 365 days / Inventory Turnover ratio

Accounts Receivable Turnover Net Credit sales / Average Receivables

ratio

Average Collection period 12 months or 365 days / Accounts Receivables

Turnover ratio

Accounts Payable Turnover Net Credit Purchase / Average Payables

ratio

Average Payment period 12 months or 365 days / Accounts Payable

Turnover ratio

Asset Turnover ratio Net sales / Average Assets

Working Capital Turnover Net sales / Average Working Capital

ratio

Long Term solvency ratios:

Debt to Equity ratio:

Meaning: Debt to Equity ratio is a solvency ratio which indicates the proportion of
debt and equity in financing of the assets of that concern. Debt to Equity ratio shows
the Margin of Safety for long term creditors and the balance between debt and equity.
The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is
calculated by dividing a company’s total liabilities by its shareholder equity. It is a
measure of the degree to which a company is financing its operations through debt
versus wholly owned funds. More specifically, it reflects the ability of shareholder
equity to cover all outstanding debts in the event of a business downturn. The debt-to-
equity ratio is a particular type of gearing ratio. The D/E ratio is difficult to compare
across industry groups where ideal amounts of debt will vary.

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Components: Borrowed Funds Includes : Debenture, loans, Interest accrued and due
on such Borrowed Funds. Owned funds includes: Equity share capital, Reserve and
Surplus ( Less Fictitious assets and P/L Debit Balance ), Paid up Preference Capital.

Formula: Borrowed Funds / Owned Funds.

Proprietary ratio:

Meaning: The proprietary ratio (also known as the equity ratio) is the proportion of
shareholders' equity to total assets, and as such provides a rough estimate of the amount
of capitalization currently used to support a business. If the ratio is high, this indicates
that a company has enough equity to support the functions of the business, and probably
has room in its financial structure to take on additional debt, if necessary. Conversely,
a low ratio indicates that a business may be making use of too much debt or trade
payables, rather than equity, to support operations (which may place the company at
risk of bankruptcy). Thus, the equity ratio is a general indicator of financial stability.
These additional measures reveal the ability of a business to earn a profit and generate
cash flows, respectively. Proprietary ratio is expressed in Percentage.

Components: Proprietor’s funds includes: Equity share capital, Reserve and Surplus (
Less Fictitious assets and P/L Debit Balance ). Total assets = Non-Current Assets +
Current Assets.

Formula: Proprietary ratio = Owned Funds / Total Assets x 100.

Capital gearing ratio:

Meaning: 'Gearing' means the process of increasing the equity shareholders' return
through the use of debt. Equity Shareholders earn more when the rate of return on total
capital is more than the rate of interest on debts. This is also known as 'leverage' or
'trading on equity'. The Capital Gearing ratio shows the relationship between two types
of capital viz. (i) Equity capital including reserves and (ii) Preference capital and Long
term borrowings. It is usually expressed as a pure ratio. This is also known as 'Capital

Structure ratio'. Capital gearing ratio is a useful tool to analyze the capital structure of
a company and is computed by dividing the common stockholders’ equity by fixed

30
interest or dividend bearing funds. Analyzing capital structure means measuring the
relationship between the funds provided by common stockholders and the funds
provided by those who receive a periodic interest or dividend at a fixed rate. A company
is said to be low geared if the larger portion of the capital is composed of common
stockholders’ equity. On the other hand, the company is said to be highly geared if the
larger portion of the capital is composed of fixed interest/dividend bearing funds.

Components: Borrowed Funds i.e. Debentures, Long term loans and Owned Funds i.e.
Equity capital, Reserve and Surplus, Preference Capital.

Formula:

Capital gearing ratio = Borrowed Funds + Preference Capital / Owned Funds –

Preference Capital

Structure ratio:

Meaning: Structure ratio studies the extent of total assets financed by proprietors.
When a higher proportion of Capital employed is financed by owners, the financial
leverage of the firm is low and therefore long-term solvency of the firm is high,
accordingly the financial risk also reduces. This shows that firm can face the period of
depression. Even in the years of low profit, the firm can continue as it will not have
major commitments for repayment of loan or interest payment. The ratio is relevant to
loan providers like bankers, financial institutions. It is also important to the investors.

Components: Owned funds = Equity Share Capital + Preference Share Capital +

Reserve and Surplus – Fictitious assets. Total Capital Employed = Owned Funds +
Borrowed Funds.

Formula:

Structure ratio = Owned Funds / Total Capital Employed

Solvency ratios Formula

Debt to Equity Borrowed Funds / Owned funds

ratio

31
 Proprietary ratio Proprietor's funds x 100 / Total Assets

Capital gearing Borrowed Funds + Preference Share Capital / Owned funds –

ratio Preference Share Capital

Structure Ratio Owned Funds / Total Capital Employed

Leverage:

Financial Leverage:

Meaning: Financial leverage is the use of borrowed money (debt) to finance the
purchase of assets with the expectation that the income or capital gain from the new
asset will exceed the cost of borrowing. Financial leverage has two primary advantages
First, it can enhance earnings as a percentage of its assets. Second, interest expense is
tax deductible in many tax jurisdictions, which reduces the net cost of debt to the
borrower. Financial leverage also presents the possibility of disproportionate losses,
since the related amount of interest expense may overwhelm the borrower if it does not
earn sufficient returns to offset the interest expense. This is a particular problem when
interest rates rise or the returns from assets decline. Financial Leverage is expressed as
Pure ratio.

Components: EBIT = Net profit after tax + Tax and Interest. EBT = EBIT – Interest.

Formula: EBIT / EBT

Operating Leverage:

Meaning: Operating leverage is a cost-accounting formula that measures the degree to

which a firm or project can increase operating income by increasing revenue. A
business that generates sales with a high gross margin and low variable costs has high
operating leverage. Operating leverage is used to calculate a company’s break-even
point and help set appropriate selling prices to cover all costs and generate a profit.
Low-operating-leverage companies may have high costs that vary directly with their

32
sales but have lower fixed costs to cover each month. Contribution margin] is a measure
of operating leverage: the higher the contribution margin is (the lower variable costs
are as a percentage of total costs), the faster the profits increase with sales. Operating
Leverage is expressed as Pure ratio.

Components: Contribution = Net Sales – Total Variable cost. EBIT = Net profit after
tax + Tax and Interest.

Formula: Contribution / EBIT

Mixed Leverage / Combined Leverage:

Meaning: Operating leverage and financial leverage are combined to assess the impact
of all types of fixed cost. It is, thus, the relationship between contribution and taxable
income.

Components: Contribution = Net Sales – Total Variable cost. EBT = EBIT – Interest.

Formula : Contribution / EBT.

Leverages Formula

Financial Leverage EBIT / EBT

Operating Leverage Contribution / EBIT

Mixed/Combined Leverage Contribution / EBT

Coverage ratios:

Interest Coverage ratio:

Meaning: It is also known as Debt Service ratio. The interest coverage ratio is a debt
and profitability ratio used to determine how easily a company can pay interest on its
outstanding debt. The interest coverage ratio is calculated by dividing a company's
earnings before interest and taxes (EBIT) by its interest expense during a given period.
The "coverage" in the interest coverage ratio stands for the length of time—typically
the number of quarters or fiscal years—for which interest payments can be made with
the company's currently available earnings. In simpler terms, it represents how many

33
times the company can pay its obligations using its earnings. The lower the ratio, the
more the company is burdened by debt expenses and the less capital it has to use in
other ways. When a company's interest coverage ratio is only 1.5 or lower, its ability to
meet interest expenses may be questionable. Companies need to have more than enough
earnings to cover interest payments in order to survive future, and perhaps
unforeseeable, financial hardships that may arise. A company’s ability to meet its
interest obligations is an aspect of its solvency and is thus an important factor in the
return for shareholders. Interest coverage ratio is expressed in times.

Components: Interest means Interest payable on Borrowed Funds. EBIT = Net profit
after tax + Tax and Interest.

Formula: EBIT / Interest.

EBITDA Coverage ratio:

Meaning: The EBITDA coverage ratio measures the ability of an organization to pay
off its loan and lease obligations. This measurement is used to review the solvency of
entities that are highly leveraged. The ratio compares the EBITDA (earnings before
interest, taxes, depreciation and amortization) and lease payments of a business to the
aggregate amount of its loan and lease payments. The EBITDA coverage ratio yields
more accurate results than the times interest earned measurement, since the EBITDA
portion of the ratio more closely approximates actual cash flows. This is because
EBITDA strips noncash expenses away from earnings. Another drawback is that this
ratio largely depends on EBITDA, but this profit number may sometimes fail to reflect
the actual cash flows. EBITDA coverage ratios is expressed in times.

Components: EBITDA = Net profit after tax + Interest + Tax + Depreciation +

Amortization. Lease payments and Loan payments.

Formula:

EBITDA coverage ratio = EBITDA + Lease payments / Lease Payments + Loan

Payments.

Coverage ratios Formula

34
 Interest Coverage ratio EBIT / Interest

EBITDA Coverage EBITDA + Lease payments / Lease payments + Loan

ratio payments

Market prospect ratios:

Earnings per share (EPS) :

Meaning: EPS is a financial ratio, which divides net earnings available to common
shareholders by the average outstanding shares over a certain period of time. The EPS
formula indicates a company’s ability to produce net profits for common shareholders.
This guide breaks down the Earnings per Share formula in detail. A single EPS value
for one company is somewhat arbitrary. The number is more valuable when analyzed
against other companies in the industry, and when compared to the company’s share
price (the P/E Ratio). Between two companies in the same industry with the same
number of shares outstanding, higher EPS indicates better profitability.. Diluted EPS
includes options, convertible securities, and warrants outstanding that can affect total
shares outstanding when exercised. Earnings per share is expressed as Pure ratio.

Components: Earnings available to equity shareholders = EBIT – Interest – Tax –

Preference Dividend. Total number of outstanding equity shares
Formula:

EPS = Earnings available to equity shareholders / Total Number of equity shares.

Price to earnings (P/E) ratio:

Meaning: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that
measures its current share price relative to its earnings per share (EPS). The price to-
earnings ratio is also sometimes known as the price multiple or the earnings multiple.
P/E ratios are used by investors and analysts to determine the relative value of a
company's shares in an apples-to-apples comparison. P/E may be estimated on a trailing
(backward-looking) or forward (projected) basis. Companies that have no earnings or
that are losing money do not have a P/E ratio because there is nothing to put in the
denominator. The price to-earnings ratio (P/E) is one of the most widely used tools by
which investors and analysts determine a stock's relative valuation. The P/E ratio helps

35
one determine whether a stock is overvalued or undervalued. A high P/E ratio could
mean that a company's stock is overvalued, or else that investors are expecting high
growth rates in the future. A low P/E ratio could mean that a company's stock is
undervalued.

Components: Market price per share, Earnings per share (Earnings available to equity
shareholders / Total no of outstanding shares) .

Formula:

P/E ratio = Market price per Share / Earnings per share.

Dividend Yield ratio:

Meaning: The dividend yield, expressed as a percentage, is a financial ratio

(dividend/price) that shows how much cash flow you are getting for each rupee invested
in an equity position. In the absence of any capital gains, dividends are treated as the
return on stock investment. The dividend yield is an estimate of the dividend-only
return of a stock investment. Assuming the dividend is not raised or lowered, the yield
will rise when the price of the stock falls. And conversely, it will fall when the price of
the stock rises. Because dividend yields change relative to the stock price, it can often
look unusually high for stocks that are falling in value quickly. New companies that are
relatively small, but still growing quickly, may pay a lower average dividend than
mature companies in the same sectors.

Investors can be classified as growth-oriented and value-oriented investors, where the

former invests in growing companies and expects returns in the form of capital gains
as the company grows over time. Value-oriented investors, on the other hand, expect
stable returns in the form of dividends along with capital gains over the long term. The
dividend yield ratio is highly useful for value-oriented investors.

Components : Dividend per share ( Total Dividend / Total number of Equity shares ),
Market price of share.

Formula:

Dividend Yield ratio = Dividend per share x 100 / Market Price per share Dividend
Payout ratio:

36
Meaning: Dividend refers to a reward, cash or otherwise, that a company gives to its
Shareholders. Dividends can be issued in various forms, such as cash payment, Stocks
or any other form. Dividend is usually a part of the profit that the company shares with
its shareholders. A company’s dividend is decided by its board of directors and it
requires the shareholders’ approval. However, it is not obligatory for a company to pay
a dividend. The dividend payout ratio is the ratio of the total amount of dividends paid
out to shareholders relative to the net income of the company. It is the percentage of
earnings paid to shareholders via dividends. The amount that is not paid to shareholders
is retained by the company to pay off debt or to reinvest in core operations. A new,
growth-oriented company that aims to expand, develop new products, and move into
new markets would be expected to reinvest most or all of its earnings and could be
forgiven for having a low or even zero payout ratio. The payout ratio is 0% for
companies that do not pay dividends and is 100% for companies that pay out their entire
net income as dividends. On the other hand, an older, established company could pay
100% earnings as dividend to their shareholders.

Components: Dividend per share ( Total Dividend / Total number of Equity shares ),
Earnings Per share ( Earnings available to equity shareholders / Total number of equity
shares.

Formula:

Dividend Payout ratio = Dividend per share x 100 / Earnings per share

Book Value per share:

Meaning: The book value per share (BVPS) metric can be used by investors to gauge
whether a stock price is undervalued by comparing it to the firm's market value per
share. If a company’s BVPS is higher than its market value per share—its current stock
price—then the stock is considered undervalued. If the firm's BVPS increases, the stock
should be perceived as more valuable, and the stock price should increase. In theory,
BVPS is the sum that shareholders would receive in the event that the firm was
liquidated, all of the tangible assets were sold and all of the liabilities were paid.
However, as the assets would be sold at market prices, and book value uses the
historical costs of assets, market value is considered a better floor price than book value
for a company. If a company's share price falls below its BVPS, a corporate raider could

37
make a risk-free profit by buying the company and liquidating it. If book value is
negative, where a company's liabilities exceed its assets, this is known as a balance
sheet insolvency. Shareholders’ equity is the owners’ residual claim in the company
after debts have been paid. It is equal to a firm's total assets minus its total liabilities,
which is the net asset value or book value of the company as a whole.

Components : Equity share Capital, Reserve and Surplus and Total number of Equity
shares.

Formula:

Book value per share = Equity Share Capital + Reserve and Surplus / Total
Number of Equity shares

Price to Book (P/B ) ratio :

Meaning: The Market to Book Ratio (also called the Price to Book Ratio), is a financial
valuation metric used to evaluate a company’s current market value relative to its book
value. The market value is the current stock price of all outstanding shares (i.e. the price
that the market believes the company is worth). The book value is the amount that
would be left if the company liquidated all of its assets and repaid all of its liabilities.
The book value equals the net assets of the company and comes from the balance sheet.
In other words, the ratio is used to compare a business’s net assets that are available in
relation to the sales price of its stock. T It is used to value insurance and financial
companies, real estate companies, and investment trusts. This ratio is used to denote
how much equity investors are paying for each dollar in net assets. The market to-book
ratio helps a company determine whether or not its asset value is comparable to the
market price of its stock. It is best to compare Market to Book ratios between companies
within the same industry. Price to book ratio is expressed as Pure ratio.

Components: Market price per share and Book value per share ( Equity capital +
Reserve and Surplus / Total Number of Equity shares ).

Formula:

Price to book ratio = Market per share / Book value per share.

38
 Market Prospect Formula
ratios

Earnings per share Earnings available to equity shareholders / Total Number of

Equity shares

Price to Earnings Market Price per share / Earnings per share

ratio

Dividend Yield ratio Dividend per share x 100 / Market price per share

Dividend Payout Dividend per share x 100 / Earnings per share

ratio

Book value per Equity Capital + Reserve and Surplus /Total Number of
share Equity shares

Price to Book Ratio Market Price per share / Book value per share

39
 Data Analysis and Interpretation
Liquidity ratios:

Current ratio = Current Assets / Current Liabilities

Current Assets = Inventories + Investments + Trade Receivables + Unbilled

Receivables + Cash and Cash equivalents + Other balances with banks + loans + Other
Financial assets + Income tax assets(net) + Other assets. Amounts in (Rs Crores )

Current Liabilities = Lease liabilities + Trade payables + Other financial

Liabilities + Unearned and deferred revenue + Other liabilities + Provisions +
Employee benefit obligations + Income tax liabilities ( net ). Amount in (Rs Crores )

Source: TCS website.

Interpretation = As per the past 5 years data TCS current ratio is declining. During
the year 2017-18 the ratio was 4.6 and it had decreased to 4.2 during the year 2018-19
. The ratio further decreased to 3.3, 2.91and 2.6 in the year 2019-20, 2020-21 and
202122 respectively.
Quick ratio = Quick assets / Current Liabilities

40
Quick Assets = Investments + Trade Receivables + Unbilled Receivables + Cash and
Cash equivalents + Other balances with banks + Loans + Other Financial assets
Amounts in (Rs Crores )

Current Liabilities = Lease liabilities + Trade payables + Other financial Liabilities +

Unearned and deferred revenue + Other liabilities + Provisions + Employee benefit
obligations + Income tax liabilities ( net ). Amount in ( Rs Crores )

Quick ratio

Years Quick Assets Current Liabilities Quick ratio

2017 -18 78,577 17,828 4.4

2018 -19 84,240 22,084 3.8

2019 -20 82,018 27,060 3.0

2020 -21 88,017 34,155 2.6

2021-22 98,128 42,351 2.3

Source: TCS website.

Interpretation: As per the past 5 years data TCS Quick ratio is declining. During the
year 2017-18 the ration was 4.4. The ratio further decreased to 3.8, 3.0 and 2.6 for the
year 2018-19, 2019-20 and 2020-21 respectively. In 2021-22 the ratio was 2.6.

Liquidity ratios 2017-18 2018 -19 2019 -20 2020 -21 2021-22

Current ratio 4.6 4.2 3.3 2.91 2.6

Quick ratio 4.4 3.8 3.0 2.6 2.3

Source: TCS website.

Profitability ratios:

Net Profit ratio = Net profit x 100 / Net sales

Interpretation = As per the past 5 years data TCS net profit ratio ranges between 18%
- 23%. During the year 2017-18 the ratio was 21% and it had increased to 21.5% during
the year 2018-19. The ratio further decreased to 20.6%, 19.8% and 20.1%. During the
years 2019-20, 2020-21& 2021-22 respectively.
Years Net profit Net sales Net Profit ratio
2017 - 18 25,880 1,23,104 21%
2018 - 19 31,562 1,46,463 21.5%

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 2019 - 20 32,447 1,56,949 20.6%
2020 - 21 32,562 1,64,177 19.8%
2021-22 38,449 1,91,754 20.1%
Source: TCS website.

Operating ratio = Operating expenses x 100 / Net sales.

Operating expenses= Employee benefit expenses + Cost of Equipment and software

licenses + Depreciation and amortization expenses + other expenses. Amount in ( Rs
Crores )

Operating ratio
Years Operating expenses Net sales Operating ratio

2017-18 92,602 1,23,104 75.2%

2018-19 1,09,013 1,46,463 74.4%

2019-20 1,18,369 1,56,949 75.4%

2020-21 1,21,696 1,64,177 74.1%

2021-22 1,43,301 1,91,754 74.7%

Source: TCS website.

Interpretation = As per the past 5 years data TCS Operating ratio ranges between
73%-76%. During the year 2017-18 the ratio was 75.2% during the year 2018-19 it was
74.4%.From 74.4% the ratio increased to 75.4% during the year 2019-20 and decreased
to 74.1% in the year 2020-21. In year 2021-22 the ratio was 74.7%.

Operating profit ratio = Operating profit x 100 / Net sales

Years Operating profit Net sales Operating profit ratio

2017-18 30,502 1,23,104 24.8%

2018-19 37,450 1,46,463 25.6%

2019-20 38,580 1,56,949 24.6%

2020-21 42,481 1,64,177 25.8%

2021-22 47,669 1,91,754 24.8%

Source: TCS website.

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Interpretation = As per the past 5 years data TCS Operating profit ratio ranges
between 24%-26%. During the year 217-18 the ratio was 24.8% increased to 25.6%
during the year 2018-19. From 25.6% the ratio decreased to 24.6% in the year 2019-20
and increased to 25.8% in the year 2020-21 and then decreased in 2021-22 it was
24.8%.

Employee Expenses ratio = Employee benefit expenses x 100 / Net sales

Years Employee Expenses Net Employee Expenses ratio

sales
2017-18 66,396 1,23,104 54.0%

2018-19 78,246 1,46,463 53.4%

2019-20 85,952 1,56,949 54.8%

2020-21 91,814 1,64,177 55.9%

2021-22 1,07,554 1,91,754 56.1%

Source: TCS website.

Interpretation = For the past 5 years TCS Employee expenses ratio ranges between
51% - 56% . During the year 2017-18 the ratio was 54.0% and it had decreased to 53.4%
during the year 2018-19 and it had increased to 54.8% in the year 2019-20. From 2019-
20 TCS Employee expenses ratio had an Uptrend it had increased from 54.8 % to
55.9% in the year 2020-21 nd further increased to 56.1% in the year 2021-22.

Return on Capital Employed ( ROCE ) = EBIT x 100 / Capital Employed.

Earnings before Interest and tax (EBIT) = Total Revenue – Employee benefit
expenses – Cost of equipment and software licenses – Depreciation and Amortization
– other expenses. Amounts in (Rs crores).

Capital Employed = Total Assets – Current Liabilities. Amounts in ( Rs crores )

Years EBIT Capital Employed ROCE

2017-18 34,144 88,468 38.6%

2018-19 41,761 92,859 45.0%

2019-20 43,172 93,839 46.0%

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 2020-21 45,615 96,604 47.2%
2021-22 52,471 99,163 52.9%
Source: TCS website.

Interpretation = During the year 2017-18 the ratio was 38.6%. From 2018-19 TCS
ROCE ratio had an Uptrend it had increased from 45% to 46 in the year 2019-20 and
further increased to 47.2% & 52.9% in the year 202021 and 2021-22 respectively.

Return on Equity (ROE) = Earnings available to equity shareholders x 100 /

Equity share capital.

Interpretation = As per the past 5 years data TCS ROE ranges between 30%-39%.
The ratio was 30.2% during 2017-18 and it had increased to 35.0% during the year
2018-19 and further increased to 38.2% in the year 2019-20 and decreased to 37.2% in
the year 2020-21. During 2021-22 the ratio increased to 42.7%.
Years Earnings available to equity Equity share capital ROE
shareholders

2017-18 25,826 85,530 30.2%

2018-19 31,472 89,899 35.0%

2019-20 32,340 84,749 38.2%

2020-21 32,430 87,108 37.2%

2021-22 38,327 89,847 42.7%

Source: TCS website.

Return on Assets = Net profit x 100 / Total Assets.

Interpretation = As per the past 5 years TCS ROA ranges between 24%-28%. During
the year 2017-18 the ratio 24.3% and increased to 27.5% in the year 2018-19. From
27.5% the ratio decreased to 26.8% and 24.9% during the year 2019-20 and 2020-21
respectively. In year 2021-22 it increased to 27.2%.

Years Net profit Total Assets ROA

2017-18 25,880 1,06,296 24.3%

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 2018-19 31,562 1,14,943 27.5%

2019-20 32,447 1,20,899 26.8%

2020-21 32,562 1,30,759 24.9%

2021-22 38,449 1,41,514 27.2%

Source: TCS website.

Profitability ratios 2017-18 2018-19 2019-20 2020-21 2021-22

Net profit ratio 21% 21.5% 20.6% 19.8% 20.1%

Operating ratio 75.2% 74.4% 75.4% 74.1% 74.7%

Operating profit ratio 24.8% 25.6% 24.6% 25.8% 24.8%

Employee Expenses ratio 54.0% 53.4% 54.8% 55.9% 56.1%

ROCE 38.6% 45.0% 46.0% 47.2% 52.9%

ROE 30.2% 35.0% 38.2% 37.2% 42.7%

ROA 24.3% 27.5% 26.8% 24.9% 27.2%

Source: TCS website.

Activity / Turnover ratios:

Accounts Receivable Turnover ratio = Net Credit sales / Average Receivables

Average Collection period = 365 days / Accounts Receivable Turnover ratio.

Years Net Credit Average Receivables Average Collection

sales Receivables Turnover ratio period ( in days )

2017- 18 1,23,104 24,943 4.94 times 74

2018- 19 1,46,463 27,346 5.36 times 68

2019- 20 1,56,949 30,532 5.14 times 71

2020- 21 1,64,177 30,079 5.46 times 67

2021-22 1,91,754 34,074 5.63 times 65

Source: TCS website.

Interpretation = As per the past 5 years data TCS Average Collection period ranges
between 65 days - 75 days . During the year 2017-18 the ratio was 74 days which

45
decreased to 78 days during the year 2018-19. From 68 days the ratio increased to 71
days during the year 2019-20 and decreased to 67 days in the year 2020-21. In
202122 it decreased to 65 days.

Working Capital Turnover ratio = Net sales / Working Capital

Working Capital (2021-22) = Average Current Assets ( Opening + Closing / 2) –

Average Current Liabilities ( Opening + Closing /2 ). Amounts in ( Rs Crores ).

Years Net sales Average Working Capital Working Capital Turnover ratio

2017-18 1,23,104 64,600 1.9 times

2018-19 1,46,463 66,722 2.2 times

2019-20 1,56,949 66,612 2.4 times

2020-21 1,64,177 64,151 2.6 times

2021-22 1,91,754 65,542 2.9 times

Source: TCS website.

Interpretation = As per the past 5 years data TCS working capital turnover ratio is
inclining. During the year 2017-18 the ratio was 1.9 times and it had increased to 2.2
times during the year 2018-19. It further increased to 2.4 times , 2.6 times and 2.9 times
During the year 2019-20 , 2020-21 and 2021-22 respectively.

Assets turnover ratio = Net sales / Average Assets

Years Net sales Average Assets Assets Turnover ratio

2016 1,17,966 96,174 1,23

46
Source: TCS website.

Interpretation = As per the past 5 years data TCS Assets Turnover ratio ranges
between 1.15 times – 1.35 times. During the year 2017-18 the ratio was 1.17 times and
it had increased to 1.32 times in the year 2018-19. The ratio further increased to 1.33
times during 2019-20 and decreased to 1.30 times in the year 2020-21. In 2021-22 it
increased to 1.40 times.
Activity ratios 2017-18 2018-19 2019-20 2020-21 2021-22

Accounts Receivable 4.94 5.36 5.14 5.46 5.63

Turnover ratio times times times times times

Average Collection period 74 days 68 days 71 days 67 days 65 days

Working Capital Turnover 1.9 2.2 2.4 2.6 2.9

ratio times times times times times

Assets Turnover ratio 1.17 1.32 1.33 1.30 1.4

times times times times times

Source: TCS website.

Leverage :

Years EBIT EBT Financial Leverage

2017-18 34,144 34,092 1.00

2018-19 41,761 41,563 1.00

2019-20 43,172 42,248 1.02

2020-21 45,615 44,978 1.04

2021-22 52,471 51,687 1.01

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 Source: TCS website.

Interpretation = As per the past 5 years data TCS Financial Leverage ranges between
1 to 1.05. During the year 2017-18 and 2018-19 the ratio was 1. The ratio increased to
1.02 in the year 2019-20 and decreased 2017-14 in the year 2020-21 and again
decreased in 2021-22 to 1.01.

Long term solvency ratios:

Debt to Equity ratio = Debt / Equity

Years Debt Equity Debt to Equity ratio

2017-18 557 85,530 0.007

Source: TCS website.

Interpretation = The ratio was 0.007 during the year 2017-18 and it had decreased to
0.004 during the year 2018-19. The ratio increased to 0.085 during the year 2019-20
and decreased to 0.078 in the year 2020-21. The ratio increased to 0.909 in 2021-22

TCS didn’t have any Preference Share Capital So the Debt-to-Equity ratio and
Capital gearing ratio is same.

Proprietary ratio = Equity Share Capital x 100 / Total Assets

48
 Years Equity share capital Total Assets Proprietary ratio

2017-18 85,530 1,06,296 80.5%

2018-19 89,899 1,14,943 78.2%

2019-20 84,749 1,20,899 70.1%

2020-21 87,108 1,30,759 66.6%

2021-22 89,846 1,41,514 63 5%

Source: TCS website.

Interpretation = As per the past 5 years data TCS Proprietary ratio is declining. During
the year 2017-18 the ratio was 80.5%. The ratio further decreased to 78.2%, 70.1% and
66.6% during the year 2018-19, 201920 and 2020-21. In 2021-22 it was 63.5%
respectively.
Long term solvency ratios 2017-18 2018-19 2019-20 2020-21 2021-22

Debt to Equity ratio 0.007 0.004 0.085 0.078 0.909

Proprietary ratio 80.5% 78.2% 70.1% 66.6% 63.5%

Source: TCS website.

Coverage ratios:

Interest Coverage ratio = EBIT / Interest

Years EBIT Interest Interest Coverage ratio

2017-18 34,144 52 656.6 times

2018-19 41,761 198 210.9 times

2019-20 43,172 924 46.7 times

2020-21 45,615 637 71.6 times

2021-22 52,471 784 66.9 times

Source: TCS website.

Interpretation = As per the past 5 years data TCS Interest Coverage ratio is drastically
declining. During the year 2017-18 the ratio was 656.6 times and it had decreased to
210.9 times and 46.7 times in the year 2018-19 and 2019-20 respectively. From 46.7
times the ratio increased to 71.6 in the year 2020-21 and in 2021-22it decreased to 66.9
times.

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 Market Prospect ratios:

Earnings per share (EPS ) = Earnings available to equity shareholders / Total

Number of Equity shares

Interpretation = During the year 2017-18 EPS was 134.19 Rs and it had decreased to
83.05 Rs in the year 2018-19. From 83.05 Rs it had increased to 86.19 Rs and 86.71 Rs
in the year 2019-20 and 202021. In 2021-22 it increased to 103.62 Rs respectively.
Years Earnings available to Total number of Equity EPS
equity shareholders shares

2017-18 25,826 192.46 134.19

Rs
2018-19 31,472 378.97 83.05
Rs

2019-20 32,340 375.23 86.19

Rs

2020-21 32,430 374.01 86.71

Rs

2021-22 38,327 369.88 103.62 Rs

Source: TCS website.

Price to Earnings ratio ( P / E ) = Market price of share / Earnings per share

Years Market price of share Earnings per share P/E

2017-18 2,845 134.19 21.2 times

2018-19 2,002 83.05 24.1 times

2019-20 1,826 86.19 21.2 times

2020-21 3,174 86.71 36.6 times

2021-22 3,749 103.62 36.2 times

Source: TCS website.

Interpretation = During the year 2017-18 the ratio was 21.2 times and it had increased
to 24.1 times in the year 2018-19. From 24.1 times the ratio decreased to 21.2 times in

50
the year 2019-20 and increased to 36.6 times in the year 2020-21 and decreasedto 36.2
times in 2021-22 respectively.

Dividend payout ratio = Dividend per share x 100 / Earnings per share

Dividend per share (2021-22)

Earnings per share (2021-22)

Dividend payout ratio (2021-22)

Years Dividend per share Earnings per share Dividend payout ratio

2017-18 50 134.19 37.3%

2018-19 30 83.05 36.1%

2019-20 73 86.19 84.7%

2020-21 38 86.71 43.8%

2021-22 43 103.62 41.5%

Source: TCS website.

Interpretation = During the year 2017-18 the ratio was 37.3% and decreased to 36.1%
in the year 2018-19. From 36.1% the ratio increased to 84.7% in the year 2019-20 and
decreased to 43.8% & 41.5% in the year 2020-21 and 2021-22.

Dividend Yield ratio = Dividend per share x 100 / Market price per share

Years Dividend per share Market price of share Dividend Yield ratio
2017-18 50 Rs 2,845 Rs 1.8%
2018-19 30 Rs 2,002 Rs 1.5%
2019-20 73 Rs 1,826 Rs 4.0%

2020-21 38 Rs 3,174 Rs 1.2%

2021-22 43 Rs 3,749 Rs 1.1%
Source: TCS website.

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Interpretation = During the year 2017-18 and 2018-19 the ratio was 1.8% and 1.5%
respectively. From 1.5% the ratio increased to 4% in the year 2019-20 and decreased
to 1.2% and 1.1% in the year 2020-21 and 2021-22.

Book value per share = Equity Share Capital / Total Number of Equity shares

Years Equity share Total number of Book value per

capital Equity shares share

2017-18 85,530 192.46 444 Rs

2018-19 89,899 378.97 237 Rs

2019-20 84,749 375.23 226 Rs

2020-21 87,108 374.1 233 Rs
2021-22 89,846 369.88 242.9 Rs
Source: TCS website.

Interpretation = During the year 2017-18 the book value was 444 Rs and decreased to
237 Rs and 226 Rs in the year 201819 and 2019-20 respectively. From 226 Rs the book
value increased to 233 Rs and futher to Rs. 242.9 Rd in the year 2020-21 & 2021-22.

Price to book ratio (P/B) = Market price of share / Book value per share

Years Market price of share Book value per share Price to book ratio

2017-18 2,845 Rs 444 Rs 6.4 times

2018-19 2,002 Rs 237 Rs 8.4 times

2019-20 1,826 Rs 226 Rs 8.1 times

2020-21 3,174 Rs 233 Rs 13.6 times

2021-22 3,749 369.88 Rs 10.14 times

Source: TCS website.

Interpretation = During the year 2017-18 the ratio was 6.4 times and it had increased
to 8.4 times in the year 2018-19 respectively. From 8.4 times the ratio decreased to 8.1
times in the year 2019-20 and increased to 13.6 times in the year 2020-21and furtherit
decreased to 10.14 times in year 2021-22.

Market Prospect ratios 2017-18 2018-19 2019-20 2020-21 2021-22

52
 Earnings per share 134.19 83.05 86.19 86.71 103.62
Rs Rs Rs Rs Rs

Price to Earnings ratio 21.2 24.1 21.2 36.6 36.2

times times times times times

Dividend Payout ratio 37.3% 36.1% 84.7% 43.8% 41.5%

Dividend Yield ratio 1.8% 1.5% 4.0% 1.2% 1.1%

Book value per share 444 Rs 237 Rs 226 Rs 233 Rs 242.9Rs

Price to Book ratio 6.4 8.4 8.1 13.6 10.14

times times times times times

Source: TCS website

CONCLUSION

Liquidity position

According to past 5 years of data TCS Current ratio and Quick ratio is declining but
TCS had managed to keep it’s Current ratio and Quick ratio above 2.5 which is
satisfactory as TCS can deal with any short term liabilities. By comparing Current ratio
and Working Capital turnover ratio it can be observed that as Current ratio is decreasing

Working Capital turnover ratio is increasing that means TCS is using it’s working
capital for growing sales.

Profitability position:

53
According to past 5 years of data TCS had a stable profitability position. Most of it’s
profitability ratios are stable except for ROCE and ROE. TCS ROCE and ROE are in
uptrend and had shown a growth of more than 20%.

Operating efficiency:

According to past 5 years of data TCS are operating efficiently. It’s Average debtor's
collection and assets turnover ratio is stable. It’s Working Capital turnover ratio is in
uptrend and had shown a growth of more than 40% similar to it’s sales which also had
shown a growth of 40% over the past 5 years.

Solvency position:

TCS have a very low debt and that debt is in the form of financial lease but during the
year 2019-20 i.e., during COVID-19 pandemic TCS financial lease liabilities increased
by 6,866 crores. TCS Debt to Equity ratio is less than 0.1 that means it’s financed
mostly by equity share capital and TCS doesn’t not have any financial leverage. Since
it’s debt is low the interest expenses are less and Interest Coverage ratio is very high.
TCS Proprietary ratio is in down trend and during the year 2019-20 it’s proprietary ratio
had decreased by 10% ( As debt increased ). TCS didn’t have any preference share
capital so capital gearing ratio and Debt to Equity ratio values are same.

Market position :

In the year 2018-19 TCS issued bonus shares in the ratio of 1:1 because of bonus issue
TCS EPS is in down trend as number of shareholders had been doubled the earnings
per share had been reduced. If the EPS is adjusted with the bonus TCS had given more
than 25% of growth in there EPS over the past 5 years. After the 2020 market crash
because of COVID-19 TCS share price had shown a significant growth and over the
past 5 years TCS P/E had been increased by 100%. From 2019-20 to 2020-21 TCS P/E
had shown a growth of more than 70%. TCS had been consistently declaring dividend
over the past 5 years during 2019-20 it had declared dividend of Rs 73 per share which
is the biggest dividend declared over the past 5 years. TCS book value per share and
price to book ratio is in down trend because of bonus issue.

54
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