Financial Statement Analysis of Infosys and Wipro through DUPONT Analysis

Abstract

Uniformity, Timeliness, Understandability, Relevance, Reliability and Comparability are some of the qualitative characteristics of financial statements. Every company aims at providing the financial information to its users about the operations of a company through formal reports in the form of financial statements. It summarizes the operations of a business and transactions conducted in a particular accounting period. Financial statements are the true indicators of the financial health of the company at a particular point of time. The study deployed secondary data published in the form of annual reports of the selected companies. In this context, the present paper aims at analyzing the financial statements of the year 2020- 21 and 2021-22 prepared as per new accounting standards i.e., Indian Accounting Standards (IND-AS) of two different companies that is Infosys and Wipro through DUPONT analysis. The study highlights there is an increase in Return on Equity (ROE) of both the companies which is the one of the important measures used to find out the direction of the company.

Introduction

I. INTRODUCTION

Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. As per new accounting standards i.e., converged International Financial Reporting Standards (IND-AS/IFRS) the financial statements include: a) Balancesheet, b) Statement of Profit and Loss Account, c) Statement of Cashflows, d) Statement of Changes in Equity and e) Notes to Accounts. Financial statements are very much essentials as every stakeholders like shareholders, foreign institutional investors, professionals, financial institutions etc., are depending on these statements to make investment decisions and to evaluate liquidity of the company for their redemption of capital. Financial statements are providing significant information about the financial health of the company. Financial statements represents the formal record of financial transactions taking place in an organization and helps the user of financial information in determining the financial position, liquidity and performance of the organization.

Financial statement analysis is a component of accounting and key to understanding an organisation’s financial condition. External stakeholders use it to understand the overall performance and business value of an organisation, while internal constituents use it as a monitoring tool for managing finances. Acting as a company’s financial health ‘report card’, Using a proper techniques in analysis of financial statement provides a comprehensive and unbiased overview of a company’s profitability, value, creditworthiness and financial security. There are different techniques are used in analysing financial statements say a) Horizontal analysis, b) Vertical analysis, c) Ratio analysis, d) Trend analysis and e) Cost volume profit analysis. It helps in knowing companies financial strengths and weaknesses, and to deal with future business activities. Although there are different models are used in analysing financial statements, the present study used simple formulas of Dupont model by taking Return of Equity as the key ratio.

II. DUPONT ANALYSIS

The DuPont analysis is a framework for analyzing fundamental performance originally popularized by the DuPont Corporation. The formula was developed in 1914 by F. Donaldson Brown, an employee of the DuPont Corporation. DuPont analysis is a useful technique used to decompose the different drivers of return on equity.

The most important aspects of a firm’s operations is the rate of return the firm is able to generate on the equity investment made by the shareholders. Equity shareholders are the real owners of the firm and take all the risk. Hence, the ROE needs to be analysed in greater path. This is achieved by the DuPont Analysis, which breaks down the ROE ration into its three important components. These three components of performance measurements are profit margin, Assets turnover and Equity multiplier.

A. Model of Dupont Analysis

III. REVIEW OF LITERATURES

Kapoor (2019) attempted to analyze the financial statements and measured the performance in terms of assets utilization and profitability. The study has used exploratory research to study past and present performance of Heavy Electrical Equipment Plant (HEEP), Ranipur (Haridwar). The author has used annual reports for a period of seven years (2007-2013). Financial ratios like Profitability ratios, leverage ratios, Profit margin ratios, Return on Investment, Return on equity were calculated. From the study it is revealed that there is weak relationship between profitability and liquidity.

Hasanaj and Kuqi (2019) analysed financial statements of a manufacturing company for the period of 2016 – 2015. Ratio analysis has been used as a tool to evaluate the performance of the company. Profitability ratios and Turnover assets ratio have been witnessed high in the year 2016 compared to 2015.

Buvaneshwari (2015) Studied the financial performance of SRI RAM PERFUMES, TRICHY for a period of five years from 2010 to 2014. The annual reports of the company were used to analyse the performance of the company. Comparative income statement analysis technique has been used for the period 2010-2014. The debtor’s turnover ratio, Return on capital employed and Net worth Turnover ratios have been calculated. From the study it is revealed that the sales level has increased 2010 to 2011 in 18.78%. The study also found that the relationship between sales to total assets are normal in all the periods. The study also observed that the firm has used capital efficiently through out the period of the study computed through Return on Capital Employed ratio.

IV. OBJECTIVES OF THE STUDY

The present study has intended to analyse the financial statements of Infosys and Wipro companies using DUPONT technique.

A. Research Methodology

Since the study is based on published annual reports of the Infosys and Wipro companies, the secondary data has been used to carry out the study. The study also used the website information and also text books.

Conclusion

It is the duty of Analysts of financial statements to analyse various financial statements say Balance Sheet, Statement of Profit and Loss Account, Statement of Cash Flows, Statement of Changes in Equity and Notes to Accounts. Financial statements of the company can be analysed through various technique. The current study analysed both Infosys and Wipro company’s financial statements through Dupont analysis by taking ROE is the main ratio.

References

[1] Hasanaj, P., & Kuqi, B. (2019). Analysis of financial statements. Humanities and Social Science Research, 2(2), p17-p17. [2] Buvaneswari, R., & Lakshmi, S. (2015). A study on financial statement analysis of Sri Ram perfumes, Trichy. International Journal of Advanced Research in Management and Social Sciences, 4(7), 232-253. [3] An Analysis of Financial StatementsMeasurement of Performance and Profitability (With Reference to BHEL, Haridwar) Ms. Samridhi Kapoor MBA (Finance and International Business WEB REFERENCES [1] https://corporatefinanceinstitute.com [2] https://www.infosys.com [3] https://www.wipro.com [4] https://einvestingforbeginners.com/

Copyright

Copyright © 2023 Dr. Shruthi S. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.