Financial Statements Analysis
Part A: Summary of Key Findings from Part B
Tata Consultancy Services Limited (TCS) is the largest IT company in India. Approximately 92% of its revenues are earned from international clients. The company has been growing at a very healthy rate over the years. In sales terms it has grown at a CAGR of 29.4% and in net profit terms it has grown at a CAGR of 34.7%. Since the company has significant overseas revenues, fluctuations in exchange rates also impact its revenues. It is evident from the fact that in FY14, sales grew by 16.2% in USD terms and by 33.5% in INR terms. A weaker INR helps TCS in a stronger growth. Some of our key findings from the detailed report after studying the standalone statements of TCS and its competitors are summarised as below: Key Accounting Policies of the Firm
The financial statements are prepared and presented under the historical cost convention on accrual basis of accounting in accordance with the Indian GAAP, except for certain financial instruments which are measured at fair value. Fixed assets exclude computers and other assets individually costing 50,000 or less. Revenues from sale of software licences are recognised upon delivery. Foreign currency monetary assets and liabilities are translated at the exchange rate prevailing on the balance sheet date and exchange gains and losses are recognised in the statement of profit and loss.
Analysis of Balance Sheet, Income Statement & Cash Flow Statement
The balance sheet has become 2.6 times over the 5 year period 2010-15. This has been possible because of a strong and constant stream of Net Profits ensuring that the Reserves and Surpluses account has increased at a CAGR of 31.2%
The company takes very little short term borrowings. These have remained negligible over the years at about 0.05% of the balance sheet size.
The company’s Cash position has been getting stronger every year and is approx. at a massive INR 130Bn at the end of FY14. It has grown at a CAGR of ~40% over the 5 year period.
The operating margins remained constant at about 27-28% through 2010-13. This grew to 32% in FY 2013-14 on the back of productivity measures taken by the company. The sales per employee increased by 22.8% in FY 14 vs FY 13. A weaker INR throughout FY14 compared to FY13 also helped margins. Average USD/INR in FY14 was at 60.85 vs 54.55 in FY13.
TCS has been continuously generating Cash from operating activities. Cash inflow from Operating Activities has steadily increased from INR 43.2Bn in FY 2010 to INR 157.9 in FY 2014.
The company has been continuously using cash to invest in bank deposits. In FY 14, the company invested over INR 65Bn in bank deposits with over 3 month maturity.
TCS’s current ratio for FY 2013 was 2.67 and its average current ratio over the last 5 financial years has been 2.41 times which hints that the Company has not been facing liquidity problems
TCS’s long term debt to equity ratio for FY 2014 was 0.22 and its average debt to equity ratio over the last 5 financial years has been 0.25 times which indicates that the Company
is operating with relative low levels of debt. The industry’s desirable debt to equity ratio is less than 0.6.
TCS’s interest coverage ratio for FY 2014 was 1006.74 and its average interest coverage ratio over the last 5 financial years has been 668 which indicate that the Company has been generating enough after servicing its debt obligations. The Profit margins are on par with the industry standards but ROE and ROA have continuously been higher indicating efficient utilizations of equity and asset base. The dividend pay-out ratio has reduced from 49% to 34% but is still on par with the industry standards.
TREND ANALYSIS & COMMON SIZE ANALYSIS
Sales, Net income and Assets have been on a strictly increasing trend. Liabilities have also increased...
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