A

PROJECT REPORT
ON

Profitability Ratio Analysis of Top 5 IT Companies (With

Reference to Capitalisation
(Submitted in partial fulfillment for the Award of Degree of Bachelor of
Business Administration)

(2013-2016)

Index

Chapter 1

Chapter 2

Chapter 3

Chapter 4

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Reference

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Chapter 1
Introduction to Ratio Analysis
Ratio analysis is a study of relationship among the various financial factors in a business.
A financial ratio is the relationship between two accounting figure expressed as a
proportion. Ratio provides clues to the financial position of a concern. These are the
pointers or indicators of financial strength, soundness, position or weakness of an
enterprise. Ratio analysis is one of the methods of analyzing financial statements. It is an
attempt to present the information of the financial statements in simplified, systematized
and summarized form.
My topic for the training is Ratio Analysis of IT Companies. In the training my
objectives are to conduct study for capital structure of IT Companies and to find out
various attributes that influence the capital structure of IT Companies. For the research
about the topic we have used the secondary data collected by the company.
The limitation of the training is the time constraint as well as the data obtained. The result
is that basic understanding of a IT Companies capital structure, particularly its level of
gearing, is a useful starting point when considering an investment in the IT Companies.

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Chapter I:
Introduction of the topic

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CHAPTER I :
INTRODUCTION OF THE TOPIC
RATIO ANALYSIS
Meaning of ratio
A ratio is an expression of the quantitative relationship between two numbers
Wixon, kell & beoford
Accounting ratio is used to describe significant relationship which exit between figures
shown on a balance sheet, P&L a/c or in a budgetary control system.
J. Batty
ratio analysis is a study of relationship among the various financial factors in a
business.
John. N. Myer
A financial ratio is the relationship between two accounting figure expressed as a proportion.
Ratio provides clues to the financial position of a concern. These are the pointers or
indicators of financial strength, soundness, position or weakness of an enterprise. Ratio
analysis is one of the methods of analyzing financial statements. It is an attempt to present the
information of the financial statements in simplified, systematized and summarized form. It
measures the profitability, efficiency and financial soundness of the business . ratio analysis is
therefore a toll to present the figures to financial statements in simple, concise and intelligible
form . there are a number of ratios, which can be calculated from the information given in the
financial statements, but the analyst has to select the appropriate data and calculate only a few
appropriate rations from the same, keeping in mind the objectives of analysis.
Factor To Be Kept In Mind While Undertaking Ratio Analysis Are:

Quality of financial statements

Purpose of analysis

Selection of ratios

Standards to be applied
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Capability of the analyst

Significance of the Ratio Analysis:

Ratios as a tool of financial analysis provide symptoms with the help of which an
analyst is in a position to diagnose the financial health of the unit. Financial analysis can be
compared with biopsy conducted by the doctor on the patient in order to diagnose the case of
illness so that treatment may be prescribed to the patient to help in recover. As there are
different group of interested parties so significance to them are different.
Management:
Management needs information regarding the profitability, operational efficiency &
financial soundness of the business, so that weakness of the business may be identified &
effective business plans may be formulated. Ratio analysis helps the management in decision
making, financial forecasting & planning. It helps in communicating the desired information
to relevant parties & facilitates coordination. Ratio provide actual basis, which can be
compared with the standards, thus helps in effective control.
Shareholders:
The shareholders, the virtual owners of business corporate units have an interest in the
welfare & progress of business. They want to know about the profitability of future prospects
of the enterprise. The requisite information is available from the analysis of financial
statements.
Workers:
Employees of the business are interested in the profit of business. Workers in the
business are paid bonus on the basis of productivity & profitability, so they have an interested
in the financial analysis of the business.
Creditors:
Creditors of the enterprise are interested in the short term & long term financial
soundness of the business. They want to ensure themselves, whether their funds are safe &
secure and the business is capable of making payment of interest regularly & also refund of
funds as per agreements.
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Government:
Financial analysis helps government in the determining tax liability. The government
is also capable of ascertaining the economic development of the country through the financial
analysis. The government requires the information for formulating effective economic plans
& balanced growth of different sector & region of the economy.
Potential Investor:
The potential investor of the business have an interest in the operational efficiency &
profit earning capacity of the business unit. They would like to know how far their previous
investment has been safe & how much the new investment will be safer & secured.
Economist & researchers:
These parties are interested in the financial activities of the business, so that they
may study the financial health of the economic structure of the business, study the rate of
economic growth, compare it with other economies & suggest effective measure to accelerate
the pace of growth.
Limitation of Ratio Analysis
The ratios are simple to calculate & easy to understand. But still they suffer from various
limitations:
1. Limited use of single ratio
A single ratio does not convey a proper message & a number of ratios have to
be calculated which may confuse analyst.
2. Lack of adequate standards
No well placed standards or rules of thumb for all ratios, which can be accepted
as norms.
3. Inherent limitations of accounting
Ratios also suffer from inherent weakness of accounting records such as their
historical nature.

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4. Window dressing
Financial statement can easily be window dressed to present a better picture of
its financial & profitability position to outsiders.
5. Personal bias
Ratios are not only means of financial analysis & not an end therefore ratios are
interpreted by different peoples according to their own method.

RATIO ANALYSIS: - The term Ratio refers to the numerical or quantitative relationship
between two or more items or variables these variables are drawn from financial statement
from balance sheet or profit and loss a/c. In simple words Ratio is a simple arithmetical
expression of the relationship of one number to another.
Ratio analysis is one of the tools or methods of analyzing financial statements.
The ratios are tool of comparison. They are used to judge the comparative performance in
fact; a ratio is a simple arithmetical expression of relationship of one number to another. It is
expressed when one figure is divided by another; or it may be defined as the indicated
quotient of two mathematical expression and analysis means examination interpretation of
numerical relationship of two members. Therefore Ratio analysis means examination and
interpretation of numerical relationships of two numbers.
So, Ratio analysis is defined as the systematic use of ratio to interpret the financial
statements so that the strengths and weakness of a firm as well as its historical performance
and current financial condition can be determined. Thus, it is the relationship between two
accounting figures expressed mathematically, which is known as financial ratio. Ratio help to
summaries the large quantitative financial data and to make the quantitative judgment about
the firm to meet its urgent obligations. It measures the firm liquidity.
SIGNAFICANCE OF THE RATIOS ANALYSIS
Ratios can be used to make inferences about a companys financial
condition, its operations and attractiveness as an investment. So, there are different parties
interested in the ratio analysis for knowing the financial position of a company for different
purposes such as.

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Shareholders/Investors:- An investor in the company will like to assess the financial

position of the concern where he is going to invest investment whether present financial
position of the concern warrants further investment or not.

Creditors: - Creditors are interested to know whether financial position of the concern
warrants their payments at a specified time or not. Current and liquid ratios will give an
idea about the current financial position of the concern.

Employees: - The employees are also interested in the financial position of the concern
especially profitability. Their wage increases and amount of fringe benefits are related to
the volume of profits earned by the concern.

Government: - Government is interested to know the overall strength of the industry.

Government may base its future policies on the basis of industrial information available
form various units. The ratios may be used as indicators of overall financial strength of
public as well as private sector. In the absence of the reliable economic information,
governmental plans and policies may not prove successful.

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INTERPRETATION OF RATIO ANALYSIS

The interpretation of Ratio is an important factor. Calculation of ratio is only a
clerical task where as interpretation requires skill, knowledge and intelligence. A single ratio
in itself does not convey any sense unless it is interpreted and conclusion is drawn from it
regarding the financial condition of the company whether it is favorable or unfavorable. The
interpretation of ratio can be made in different ways:

Single Absolute Ratio

Group of Ratio

Historical Comparison

Projected Ratio

Inter-Firm comparison

TYPES OF RATIO:The ratio analysis is one of the most useful and common method of
analyzing financial statements. As compare to other tools of financial analysis, the ratio
analysis provides very useful conclusion about various aspect of the working, like financial
position, solvency stability, liquidity and profitability of an enterprise, ratio are classified
into four important categories:

Liquidity Ratio

Solvency Ratio

Activity Ratio

profitability Ratio

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(1)

Liquidity Ratio: - Liquidity Ratios measure the ability of a firm to meet

short-term financial soundness of the company. It judges whether current
assets are sufficient to meet the current liabilities. The company must be
able to meet its current obligation out of the current assets. It should not
depend upon its long-term sources to pay its short-term liabilities. Its is
also known as working capital Ratio.

Computation: - The ratio is calculated on the basis of the following:

Current Assets
Current Ratio = --------------------Current liabilities
Where,
Current Assets: - Current assets are those assets which are converted into cash within
a year.
Current liabilities: - Current liabilities are those liabilities which to be paid within a
year.
(a)

Liquid Ratio: - Liquid Ratio is also known as quick or acid test Ratio. It is
more ratios test of liquidity than the current Ratio. Liquid shows the
relationship between quick assets or assets and current or liquid liabilities. An
asset is said to be liquid if it can be converted into cash within a short period
within loss of value. In that sense cash in hand and cash at bank are the most
liquid assets. The other assets which can be including in liquid assets are B/R,
Sundry debtors, Marketable security and short-term investments.
Inventory can not be treated as liquid assets because they can not be

converted into cash immediately without a sufficient loss of value. In same manner,
prepaid expenses on also excluded from the list of liquid assets, because they are not
expected to be converted into cash.
Computation: - The quick ratio can be calculated on the basis of following formula:

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Liquid Assets
Liquid Ratio = ----------------------Current liabilities
Current Assets-Stock- prepaid expenses
Liquid Ratio= ----------------------------------------------Current liabilities
(b)

Absolute Liquid Ratio: - It is also known as cash Ratio. The absolute

liquidity of a concern, both receivables (B/R, Debtors) and inventories are
excluded from current assets and only absolute liquid assets, such as cash in
hand; cash at bank and readily realizable securities are taken into
consideration.

Computation: - Absolute Liquidity Ratio is calculated as follows:

Absolute Liquid Assets
Absolute Liquidity Ratio= ---------------------------------Current liabilities
Where,
Absolute Liquid Assets= cash in hand+ Short term Marketable Security + Short
term investment.
(2)

Solvency Ratio:-

Meaning: - Solvency is a state; where the company is supposed to be financially

sound and capable of meeting its long-term liability out of its assets. Solvency
ratios are calculated to judge the long-term financial solvency of the business.
These ratios measure the ability of the enter pries to pay interest charges regularly
and its ability to interest charges regularly and its ability to repay the principal
(Capital) on maturity.

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Types: - Usually the following ratios are calculated to measure the long-term
financial solvency of the business undertaking:

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