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INFOSYS & INTERGLOBE Return Ratios Analysis

This document analyzes return ratios for Infosys and Interglobe Aviation. It discusses return on equity (ROE), return on capital employed (ROCE), and return on assets (ROA). For Infosys, the ROE is consistently above 20%, indicating strong profitability. However, Interglobe Aviation saw a large decrease in ROE from 2018 to 2019 due to rising costs. The document also provides observations on the companies' ROCE and ROA ratios over time.

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Hari Haran
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50 views

INFOSYS & INTERGLOBE Return Ratios Analysis

This document analyzes return ratios for Infosys and Interglobe Aviation. It discusses return on equity (ROE), return on capital employed (ROCE), and return on assets (ROA). For Infosys, the ROE is consistently above 20%, indicating strong profitability. However, Interglobe Aviation saw a large decrease in ROE from 2018 to 2019 due to rising costs. The document also provides observations on the companies' ROCE and ROA ratios over time.

Uploaded by

Hari Haran
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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INFOSYS & INTERGLOBE Return Ratios Analysis

Return on Equity: It is a profitability ratio that measures the ability of a firm to generate profits from
the shareholders investments in the company.

The higher the ratio percentage, the more efficient management is in utilizing its equity base and the
better return is to investors

Here, the shareholder’s equity is taken as the average value over the year.

Consolidated ROE: (Infosys) Consolidated ROE: (Interglobe Aviation)

Observations and Reasoning: Observations and Reasoning:


Ideal long-term average ROE should be above 15%.
Ideal long-term average ROE should be above We can see a huge decrease in the ROE from 41.73% in
15%. 2018 to 2.26% in 2019. During this period, although the
From the graph it can be seen that the ROE is revenue figures increased by approximately 30%, the
always greater than 20% which represents the airlines saw huge increase in its cost elements by about
company’s ability to generate strong 95%. A major chunk of about 47% cost increase was seen
profitability with the equity provided. The due to maintenance and supplementary rentals while the
investors are able to generate good returns on rest can be attributed to the factors like increase in fuel
their equity invested and this has been on an prices, staff salary increases etc.
increasing trend.

Standalone ROE: Standalone ROE:


Observations and Reasoning: Observations and Reasoning:
From the graph it can be seen that there are drastic
It can be seen that the company is able to changes in the ROE of the company over the years with its
generate steady profits for every additional peak value in 2015.However, on further analysis it can be
amount of equity investment made. Hence seen that the equity amount on which company has been
here the ROE paints a good picture about the operating has seen a sudden rise from 2016 onwards
company’s financials as the shareholders are (because of the IPO) and till then debt has been a main
able to generate good profitable margins on source of financing. Also, the net profit of the company
each additional investment can be said be increasing steadily over the years with a
sudden decrease in the profit in the last year due to the
cost parameters.

Return on Capital Employed (ROCE):

It measures how efficiently a company can generate profit from its capital employed. It helps
investors understand how much each rupee of capital employed generates

ROCE is generally considered to be a more useful ratio than ROE to evaluate the longevity of the
company
Consolidated ROCE: (Infosys) Consolidated ROCE: (Interglobe Aviation)

Observations and Reasoning:

As already discussed in case of ROE the Earnings before


interest and tax (EBIT) has seen a drastic fall in the year
2019 due to the increase in the costs. While the capital
expenditure of the company has seen a gradual increase
over the years, this fall in EBIT from 3540 (in 2018) to 415
(in 2019) resulted in the low ROCE

Standalone ROCE: Standalone ROCE:

Observations and Reasoning: (for both cases)


Observations and Reasoning:
The calculation above shows that INFY’s 2016 can be seen as the year the company has the highest
earnings were 30.96% of capital employed. ROCE. It was in 2016 that the company issued its IPO and
Comparing this to a healthy 15% benchmark also 2016 as a whole for the airlines industry was
shows Infosys is currently able to return a profitable with Interglobe generating the highest profits in
fantastic amount to owners for the use of their the airlines industry. The key factors contributing for this
capital, which is a good sign for those who are the obsessive focus on cost cutting and bringing
believe this will continue and the company’s efficiency in turnaround time without loosing quality at
management will find good uses for the that time.
earnings they create.

Although Infosys is in a favourable position,


you should know that this could change if the
company is unable to maintain a strong ROCE
above the benchmark, which will depend on
the behaviour of the underlying variables (EBT
and capital employed). Because of this, it is
important to look beyond the final value of
INFY’s ROCE and understand what is happening
to the individual components. Looking at the
past 3-year period shows us that INFY
weakened investor return on capital employed
from 32.54%. With this, the current earnings of
US$3.12b improved from US$2.86b however
capital employed has increased by a
proportionally greater amount in response to a
hike in the level of total assets , which suggests
investor’s ROCE has fallen because the
company requires more capital to create
earnings despite the previous growth in EBT.

Return on Assets (ROA): It is a profitability ratio that measures the effectiveness of a company to
manage its assets to produce profits

Higher ratio is favoured to investors as it shows that the company is managing its assets efficiently
and producing greater amount of net income. This is ideal for comparing different companies in the
same industry as in different industries the usage of assets is different

Consolidated ROA: (Infosys) Consolidated ROA: (Interglobe Aviation)

Standalone ROA: Standalone ROA:


Observations and Reasoning (for both cases): Observations and Reasoning (for both cases):

According to NYSE, Infosys ROA is ranked higher Because an airline company’s primary assets, its
than 95% of the companies in the software planes, generate the bulk of its revenues, this metric
industry. The total assets value of Infosys has seen is a particularly appropriate profitability measure. In
a steady increase over the time period, however the airline industry, due to the increased competition
due to the increase in the annual net income at a in the recent years. Most of the companies are
greater proportion the company is able to maintain offering low cost services in an attempt to establish a
a stable ROA factor. In 2018, the company cleared good market share and hence even though there is an
some of its debts by releasing its assets and hence increase in the total asset share of InterGlobe, the net
the total assets value has decreased in that time profit saw a huge dip in the recent years, particularly
period by 7%, however there was a growth in the in 2019.
net income even during that time that led to more
than 20% of ROA during that time.

Sensitivity Analysis of Infosys Return in Equity:

Key Observations:

1. The Industry average ROE is 11%. Any percentage above industry average is considered good ROE.
2. The current ROE of the company can be seen to be 24.98%, which means keeping the shareholders
equity constant a 10% change in the net profits increases/decreases the ROE factor by about 2.5%. This
means that the company financials are very strong and they can sustain even a 50% reduction in profits
due to revenue reduction or cost increase and still manage to provide investors with industry average
returns
3. Also, it should be noted that from the balance sheet Infosys has zero debts in the corporate
structure and hence the ROE is not a result of increased leverage. Here, a 10% change in the
shareholder’s equity changes the ROE by about 2.2% and hence Infosys can utilize some of the equity
amount in long term projects instead of worrying about the shareholders returns as still it can have a
healthy ROE as compared to that of Industry

Note: However, it should be noted that financial ratios should generally be studied in combination and
standalone analysis of single ratio may not depict the complete picture of the company’s performance

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