LIQUIDITY RATIO Current ratio:

The current ratio is also known as the working capital ratio and is normally presented as a real ratio. That is, the working capital ratio looks like this: Current ratio = Current Assets: Current Liabilities Current assets are a category of assets on the balance sheet that represent cash and assets that are expected to be converted into cash within one year. Current liabilities are a category of liabilities on the balance sheet that represent financial obligations that are expected to be settled within one year. The higher the current ratio, larger is the amount of cash available per current liability, the more is the firms ability to meet current obligations and the greater is the safety of funds of short-term creditors. A current ratio of over 2:1 is good news, generally, although if you are comparing your current ratio from year to year and it seems abnormally high, you may have problems with collecting accounts receivable or be carrying too much inventory.
Current ratio Wipro Infosys 2007 1.4 2.4 2008 2.1 3.1 2009 1.8 4.4

Above are the current ratios of wipro and Infosys of past 3 years. In 2007 the current ratio of Infosys was 2.4 as compared to wipros 1.4. hence it is easy to conclude here that in 2007, Infosys is a safer venture than Wipro as it has Rs 2.4 current asset per a rupee of current liability, the later has Rs 1.4 of current asset per current liability. In 2008, we see that both of the current ratio increases with wipros goes upto 2.1 while infosyss goes upto 3.1, again following the definition Infosys has better liquidity/shortterm solvency as compared to wipro. In 2009, we see a decline in wipros current ratio by 14.285 % to 1.8 while the current ratio of Infosys rises by 42.9% to 4.4 , so this year also, Infosys s current ratio is better. After analyzing all 3 yrs current ratios of both the companies, we have come to the conclusion that Infosys has better liquidity/short-term solvency, larger short-term liquidity buffer and is a safer firm to invest in as compared to Wipro.

Acid test/quick ratio:

It is a measure of liquidity calculated dividing current assets minus inventory and pre-paid expenses by current liabilities. It is a more rigorous and penetrating test of liquidity position of a firm. An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.

The quick ratio is more conservative than the current ratio, a more wellknown liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations

need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength. Yet it is not a conclusive test. Both the current n quick ratios should be considered in relation to the industry average to infer whether the firms short-term financial position is satisfactory or not. Generally , an acid-test ratio of 1:1 is considered satisfactory.

Quick Ratio 2007 Wipro Infosys 2008 2009

1.2
1.5

1.5
2.9

1.1
4

In the above data, we can see the quick ratios of both Infosys and Wipro being calculated. Starting from 2007, we see that Wipros quick ratio is 1.2, while Infosyss quick ratio is 1.5, we can make out that Infosys is again in a better position to pay all its current liabilities. As we move to cover all 3 years, we see that Infosys quick ratio are constantly increasing , while Wipros quick ratio increase to 1.5 in 2008 while it goes down to 1.1 in 2009. Hence we can make a conclusion that both are above the satisfactory, both can meet all current claims and Infosys is better and safer firm to invest in than Wipro.

Cash ratio:
The ratio of a company's total cash and cash equivalents to its current liabilities. The cash ratio is most commonly used as a measure of company liquidity. It can therefore determine if, and how quickly, the

company can repay its short-term debt. A strong cash ratio is useful to creditors when deciding how much debt, if any, they would be willing to extend to the asking party. The cash ratio is generally a more conservative look at a company's ability to cover its liabilities than many other liquidity ratios. This is due to the fact that inventory and accounts receivable are left out of the equation. Since these two accounts are a large part of many companies, this ratio should not be used in determining company value, but simply as one factor in determining liquidity.

Cash ratio= (cash equivalents + cash) / current liabilities

Cash Ratio 2007 Wipro Infosys 2008 2009

0 .5
1.6

0 .7
2.1

0 .3
3

From the above calculated cash ratios of both Wipro and Infosys of past 3 years, we can conclude that , the liquidity in the Infosys is on the rise, its more capable of paying out its liabilities.

ACTIVITY RATIO Debt-equity ratio:

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. Debt/Equity ratio = Total Liabilities / Shareholders equity Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as companies'. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.

Debt - Equity Ratio 2007 Wipro Infosys 2008 2009

0.0 26
3.6

0 .329
3

0.4 01
2.1

The debt-equity ratio above stated of both Wipro and Infosys have being calculated by the stated formula. The debt-equity ratio is of three years 2007, 2008 and 2009. As we can see, debt-equity ratio is on the decline, from 3.6 in 2007 to 2.1 in 2009. This means that Infosys has cut down the debt to finance its increased operations (high debt to equity). The company is generating more earnings than it would have without this outside financing. On the other hand, wipro debt-equity ratio is on the rise from 0.026 in 2007 to 0.401 in 2009. We can conclude from the above data that wipro is increasing its money lending from outside, but since the ratio is kept lower than 0.50.

Gearing ratio:
Gearing is quite often included in the classification of liquidity ratios as this ratio focuses on the longterm financial stability of an organisation. It measures the proportion of capital employed by the business that is provided by long-term lenders as against the proportion that has been invested by the owners. Thus, we can see how much of an organisation has been financed by debt. It is given by the formula: Gearing = long term liabilities + preference shares x 100 total capital employed

Once again this is expressed as a percentage. Total Capital = ordinary share capital + preference share capital + Reserves + Debentures + Long-term loans

Long term liabilities = Long-term loans + debentures

The gearing ratio shows how risky an investment a company is. If loans represent more than 50% of capital employed, the company is highly geared. Such a company has to pay interest on its borrowings before it can pay dividends to shareholders or retain profits for reinvestment. High gearing figures indicate a high degree of risk. As ordinary shareholders should enjoy a greater rate of return from lower geared companies. Low geared companies i.e. those under 50% should provide therefore a lower risk investment opportunity; they should also be able to negotiate loans much more easily than a highly geared company as they are not already carrying a high proportion of debt.

Gearing Ratio 2007 Wipro Infosys 2008 2009

0 .1
0.2

1 .0
0.2

1 .1
0.1

From the above table and graph, we can see the trends of the both wipro and infosys.

TURNOVER RATIO Total Assets Turnover

Asset turnover is the relationship between sales and assets

The firm should manage its assets efficiently to maximise sales. The total asset turnover indicates the efficiency with which the firm uses all its assets to generate sales. It is calculated by dividing the firms sales by its total assets.

This ratio measures a businesss sales in relation to the assets it uses to generate these sales. The formula to calculate this ratio is Asset turnover = sales/net assets This formula measures the efficiency with which businesses use their assets. An increasing ratio over time generally indicates that the firm is operating with greater efficiency. A fall in the ratio can be caused by a decline in sales or an increase in assets employed. The results of asset turnover ratios vary enormously. A supermarket may have a high figure as it has relatively few assets in relation to sales. A shipbuilding firm is likely to have a much lower ratio because it requires many more assets. Generally, the higher the firms total asset turnover, the more efficiently its assets have been utilised.

Total Assets Turnover Ratio 2007 0 .1 Wipro Infosys 0.1

2008

2009

1.0
1.5

1.1
1.1

PROFITABILITY RATIO Gross Profit Margin

Normally the gross profit has to rise proportionately with sales. It can also be useful to compare the gross profit margin across similar businesses although there will often be good reasons for any disparity.

This ratio examines the relationship between the profits made on trading activities only (gross profit) against the level of turnover/sales made. It is given by the formula Gross Profit Margin = (gross profit / turnover (in terms of sales)) x 100 Obviously the higher the profit margin a business makes the better. However, the level of gross profit margin made will vary considerably between different markets. For example the amount of gross profit percentage put on clothes, (especially fashion items), is far higher than that put on food items. So any result gained must be looked at in the context of the industry in which the firm operates.

Gross profit Ratio 2007 Wipro Infosys 2008 2009

8 .5 6
73.2

1 1.1 0
70.2

9 0.8
72.7

Net Profit Margin

This is a widely used measure of performance and is comparable across companies in similar industries. The fact that a business works on a very low margin need not cause alarm because there are some sectors in the industry that work on a basis of high turnover and low margins, for examples: supermarkets and motorcar dealers. What is more important in any trend is the margin and whether it compares well with similar businesses. As opposed to gross profit margin this ratio measures the relationship between the net profit (profit made after all other expenses have been deducted) and the level of turnover or sales made. It is given by the formula:

Net Profit Margin

= (net profit / Turnover (sales)) X 100

As with gross profit, a higher percentage result is preferred. This is used to establish whether the firm has been efficient in controlling its expenses. It should be compared with previous years results and with other companies in the same industry to judge relative efficiency. The net profit margin should also be compared with the gross profit margin. For if the gross profit margin has improved but the net profit margin declined, this

shows that profits made on trading are becoming better, however the expenses incurred in the running of the business are also increasing but at a faster rate than profits. Thus efficiency is declining.

Net Profit ratio 2007 Wipro Infosys 2008 2009

16 .0
49.8

12.8
47.4

18.0
47.4

Return on Investment (ROI)

Income is earned by using the assets of a business productively. The more efficient the production, the more profitable the business. The rate of return on total assets indicates the degree of efficiency with which management has used the assets of the enterprise during an accounting period. This is an important ratio for all readers of financial statements. ROI = (EAT / total assets) Investors have placed funds with the managers of the business. The managers used the funds to purchase assets which will be used to generate returns. If the return is not better than the investors can achieve elsewhere, they will instruct the managers to sell the assets and they will invest elsewhere. The managers lose their jobs and the business liquidates.

Returns on Investment 2007 12.8 W ipro Infosys 25.3

2008

2009

14.1
25.4

9.0
24.8

Return on Equity (ROE)

This ratio shows the profit attributable to the amount invested by the owners of the business. It also shows potential investors into the business what they might hope to receive as a return. The stockholders equity includes share capital, share premium, distributable and non-distributable reserves. The ratio is calculated as follows: ROE = EAT / Stockholders equity The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. There are several variations on the formula that investors may use: 1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income - preferred dividends/commonequity.

2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two. 3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the endof-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period.

Return on Equity 2007 Wipro 29.6 Infosys 28.2

2008 26.2 29.3

2009 20.4 28.7

CONCLUSION:
The study made an attempt to analyse and compare the financial performance of the two leading software industry over the last three financial years. The conclusion has been drawn by analysing various variables on parameters like liquidity, solvency, profitability, etc.

Based on the analysis it can be concluded that :

Infosys has an edge in all segments as compared to Wipro on the facts that:

Infosys has a better liquidity position as compared to Wipro.

Although Gross Profit Margin of Wipro is higher than Infosys but the Net Profit Margin of Infosys is much better than Wipro, which means that Infosys profitability position is good.

Return on Investment and Return on Equity is better in case of Infosys.

In the coming future the chances of Infosys performing better is much more than that of Wipro.

REFERENCES

Annual Reports and company profile sources:

www.wipro.in www.infosys.com www.google.com Articles sources: www.it.iitb.ac.in www.oppapers.com Ratios FINANCIAL MANAGEMENT : S N Maheswari