hcl- profitabilty ratios

Download Hcl- Profitabilty Ratios

Post on 11-Nov-2014




0 download

Embed Size (px)




ANALYSIS OF THE PROFITABILITY RATIOS OF HCL1COMPANY PROFILE: HCLCompany overview HCL Enterprise is a leading Global Technology and IT enterprise that comprises two companies listed in India - HCL Technologies & HCL Infosystems. The 3-decade-old enterprise, founded in 1976, is one of India's original IT garage startups. Its range of offerings spans Product Engineering, Custom & Package Applications, BPO, IT Infrastructure Services, IT Hardware, Systems Integration, and distribution of ICT products. The HCL team comprises approximately 45,000 professionals of diverse nationalities, who operate from 17 countries including 360 points of presence in India. HCL has global partnerships with several leading Fortune 1000 firms, including leading IT and Technology firms. HCL Technologies is one of India's leading global IT Services companies, providing software-led IT solutions, remote infrastructure management services and BPO. Having made a foray into the global IT landscape in 1999 after its IPO, HCL Technologies focuses on Transformational Outsourcing, working with clients in areas that impact and re-define the core of their business. The company leverages an extensive global offshore infrastructure and its global network of offices in 18 countries to deliver solutions across select verticals including Financial Services, Retail & Consumer, Life Sciences & Healthcare, Hi-Tech & Manufacturing, Telecom and Media & Entertainment (M&E). For the quarter ended 31st December 2007, HCL Technologies, along with its subsidiaries had last twelve months (LTM) revenue of US $ 1.65 billion (Rs. 6715 crores) and employed 47,954 professionals. Born in 1976, HCL has a 3 decade rich history of inventions and innovations. In 1978, HCL developed the first indigenous micro-computer at the same time as Apple and 3 years before IBM's PC. This micro-computer virtually gave birth to the Indian computer industry. The 80's saw HCL developing know-how in many other technologies. HCL's in-depth knowledge of Unix led to the development of a fine grained multi-processor Unix in 1988, three years ahead of Sun and HP. HCL's R&D was spun off as HCL Technologies in 1997 to mark their advent into the software services arena. During the last eight years, HCL has strengthened its processes and applied its know-how, developed over 30 years into multiple practices - semi-conductor,


Tarumoy Chaudhuri, Student pursuing B.B.A. L.L.B. (Hons.) at National Law University (Jodhpur).

Electronic copy available at: http://ssrn.com/abstract=1672242

operating systems, automobile, avionics, bio-medical engineering, wireless, telecom technologies, and many more. Today, HCL sells more PCs in India than any other brand, runs Northern Ireland's largest BPO operation, and manages the network for Asia's largest stock exchange network apart from designing zero visibility landing systems to land the world's most popular airplane.

INTRODUCTION TO RATIO ANALYSISWhen it comes to investing, analyzing financial statement information (also known as quantitative analysis) is one of the most important elements in the fundamental analysis process. At the same time, the massive amount of numbers in a company's financial statements can be bewildering and intimidating to many investors. However, through financial ratio analysis, they will be able to work with these numbers in an organized fashion. Purposes and Considerations of Ratios and Ratio Analysis Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Ratio analysis is primarily used to compare a company's financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry. There are several considerations one must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies. If one is making a comparative analysis of a company's financial statements over a

certain period of time, an appropriate allowance for any changes in accounting policies that occurred during the same time span should be made When comparing one business with another in the same industry, any material

differences in accounting policies between your company and industry norms should be allowed.

Electronic copy available at: http://ssrn.com/abstract=1672242

When comparing ratios from various fiscal periods or companies, inquiry about the

types of accounting policies used should be done. Different accounting methods can result in a wide variety of reported figures. Determine whether ratios were calculated before or after adjustments were made to

the balance sheet or income statement, such as non-recurring items and inventory or pro forma adjustments. In many cases, these adjustments can significantly affect the ratios. Any departures from industry norms should be carefully examined.

When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills. Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. The key question in ratio analysis isn't only to get the right answer: for example, to be able to say that a business's profit is 10% of turnover. We can use ratio analysis to try to tell us whether the business 1. is profitable 2. has enough money to pay its bills 3. could be paying its employees higher wages 4. is paying its share of tax 5. is using its assets efficiently 6. has a gearing problem 7. is a candidate for being bought by another company or investor and more, once we have decided what we want to know then we can decide which ratios we need to solve the problem facing us. Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible.

This massive data overload could seem staggering. Luckily, there are many welltested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking. As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable. Not everyone needs to use all of the ratios we can put in these categories so the table that we present at the start of each section is in two columns: basic and additional. The basic ratios are those that everyone should use in these categories whenever we are asked a question about them. We can use the additional ratios when we have to analyse a business in more detail. Use and Limitations of Financial Ratios Attention should be given to the following issues when using financial ratios: A reference point is needed. To be meaningful, most ratios must be compared to

historical values of the same firm, the firm's forecasts, or ratios of similar firms. Most ratios by themselves are not highly meaningful. They should be viewed as

indicators, with several of them combined to paint a picture of the firm's situation. Year-end values may not be representative. Certain account balances that are used to

calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors. Such changes may distort the value of the ratio. Average values should be used when they are available. Ratios are subject to the limitations of accounting methods. Different accounting

choices may result in significantly different ratio values.

USERS OF ACCOUNTING INFORMATIONThe list of categories of readers and users of accounts includes the following people and groups of people: Investors Lenders Managers of the organisation

Employees Suppliers and other trade creditors Customers Governments and their agencies Public Financial analysts Environmental groups Researchers: both academic and professional



to help them determine whether they should buy shares in the business, hold on to the shares they already own or sell the shares they already own. They also want to assess the ability of the business to pay dividends.

Lenders Managers

to determine whether their loans and interest will be paid when due might need segmental and total information to see how they fit into the overall picture


information about the stability and profitability of their employers to assess the ability of the business to provide remuneration, retirement benefits and employment opportunities