Hcl- Profitabilty Ratios

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<p>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 &amp; 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 &amp; 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 &amp; Consumer, Life Sciences &amp; Healthcare, Hi-Tech &amp; Manufacturing, Telecom and Media &amp; Entertainment (M&amp;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&amp;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,</p> <p>1</p> <p>Tarumoy Chaudhuri, Student pursuing B.B.A. L.L.B. (Hons.) at National Law University (Jodhpur).</p> <p>Electronic copy available at: http://ssrn.com/abstract=1672242</p> <p>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.</p> <p>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</p> <p>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</p> <p>differences in accounting policies between your company and industry norms should be allowed.</p> <p>Electronic copy available at: http://ssrn.com/abstract=1672242</p> <p> When comparing ratios from various fiscal periods or companies, inquiry about the</p> <p>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</p> <p>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.</p> <p>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.</p> <p>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</p> <p>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</p> <p>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</p> <p>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</p> <p>choices may result in significantly different ratio values.</p> <p>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</p> <p> Employees Suppliers and other trade creditors Customers Governments and their agencies Public Financial analysts Environmental groups Researchers: both academic and professional</p> <p>WHAT DO THE USERS OF ACCOUNTS NEED TO KNOW?</p> <p>Investors</p> <p>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.</p> <p>Lenders Managers</p> <p>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</p> <p>Employees</p> <p>information about the stability and profitability of their employers to assess the ability of the business to provide remuneration, retirement benefits and employment opportunities</p> <p>Suppliers and other businesses supplying goods and materials to other businesses will read trade creditors their accounts to see that they don't have problems: after all, any supplier wants to know if his customers are going to pay their bills! Customers the continuance of a business, especially when they have a long term involvement with, or are dependent on, the business Governments and their agencies the allocation of resources and, therefore, the activities of business. To regulate the activities of business, determine taxation policies and as the basis for national income and similar statistics Local community Financial statements may assist the public by providing information</p> <p>about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area Financial analysts they need to know, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on Environmental groups many organisations now publish reports specifically aimed at informing us about how they are working to keep their environment clean. Researchers researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements</p> <p>WHICH RATIOS WILL EACH OF THESE GROUPS BE INTERESTED IN?Interest Group Investors Lenders Managers Employees Ratios to watch Return on Capital Employed Gearing ratios Profitability ratios Return on Capital Employed</p> <p>Suppliers and other trade creditors Liquidity Customers Governments and their agencies Local Community Financial analysts Environmental groups Researchers Profitability Profitability This could be a long and interesting list Possibly all ratios Expenditure on anti-pollution measures Depends on the nature of their study</p> <p>Therefore from the above table it is clear that profitability ratios are generally required by owners, managers, customers, governments and their agencies. There can be still more interest groups who will be interested in these ratios.</p> <p>PROFITABILITY RATIOSProfitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Profitability ratios focus on how well a firm is performing. Profit margins measure performance with relation to sales. Rate of return ratios measure performance with relation to the size of the investment. The owners and management or the company itself are interested in the financial soundness of the firm apart from its creditors. The management of the firm is naturally eager to measure its operating efficiency. Similarly, the owners invest their funds in the expectation of reasonable returns. The operating efficiency of a firm and its ability to ensure adequate returns to its shareholders depends ultimately on the profits earned by it. In other words, the profitability ratios are designed to provide answers to questions such as (i) (ii) (iii) (iv) (v) (vi) Is the profit earned by the firm adequate? What rate of return does it represent? What is the rate of profit for various divisions and segments of the firm? What are the earnings per share? What was the amount paid in dividends? What is the rate of return to equity shareholders?</p> <p>The profitability ratios can be sub-divided into two categories: A. In relation to sales which include gross profit ratio, net profit ratio and operating profit ratio B. In relation to investments which include return on assets, return on return on capital employed and return on shareholders equity Profit is the difference between turnover, or sales, and costs: that is, Profit = Sales costs A profit margin is one of the profit figures we just mentioned shown as a percentage of turnovers or sales. They always tell us how much profit, on average, our business has earned per Rupee of turnover or sales.</p> <p>In the following pages, these ratios have been evaluated and analysed in detail.</p> <p>A. Profitability Ratios Related to Sales These ratios are based on the premise that a firm should earn sufficient profit on each rupee of sales. If adequate profits are not earned on sales, there will be difficulty in meeting the operating expenses and no returns will be available to the owners. These ratios are of three types which are discussed below.</p> <p>1. Gross profit Margin:</p> <p>A company's cost of sales, or cost of goods sold, represents the expense related to labor, raw materials and manufacturing overhead involved in its production process. This expense is deducted from the company's net sales/revenue, which results in a company's first level of profit, or gross profit. The gross profit margin is used to analyze how efficiently a company is using its raw materials, labor and manufacturing-related fixed assets to generate profits. A higher margin...</p>