FINANCIAL RATIO ANALYSIS OF INFOSYS Ltd.

CHAPTER - I

IN T R O D U CT IO N

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Chapter 1: Introduction – Financial Ratio Analysis of Infosys Ltd. (FY 2021– 2025)

1.1 Background of the Study

In th e m o d e rn c o rp o rate w o rld , w he re c o m pan ie s are inc r e asin gly j ud ge d b y th e ir f in an c ial

sustaina b ility , strate gic ad ap tab ility , and share ho ld e r v alue , th e ro le o f f inan c ial

an aly sis to o ls h as b e c o m e param o un t. A m o ng the se to o ls , f in anc ial ratio an aly s is re m ain s

o n e o f th e m o st e f f e c tiv e an d w id e ly use d m e th o d s f o r in te rpre tin g the f in anc ial

p e rf o rm anc e and h e alth o f a b usine ss . It tran slate s f inan c ial state m e nts in to

un d e rstand ab le , c o m p arativ e , and d e c isio n -supp o rtiv e m e tric s.

In f o sy s L td ., as a glo b al le ad e r in IT se rv ic e s, c o n sultin g, and o utso urc ing, h as b e e n

instrum e n tal in s hap in g In d ia’ s p re se nc e in th e glo b al te c h are na. Ev aluating its f in anc ial

p e rf o rm anc e o v e r th e last f iv e f isc al y e ars (2 0 2 1 – 2 02 5 ) o f f e rs no t o n ly a glim pse in to

th e c o m pan y ’ s o p e ratio nal stre ngth b ut also re f le c ts b ro ad e r ind ustr y and e c o no m ic

sh if ts. T hr o ugh th is stud y , th e ap plic atio n o f r atio analy sis to Inf o sy s L td . w ill p ro v id e

insigh t into p ro f itab ility tre n d s, liq uid ity man age m e n t, d e b t strate gy , and e f f ic ie nc y .

1.2 Concept of Financial Ratio Analysis

Finan c ial ratio analy sis inv o lv e s c o m p uting spe c if ic ratio s f ro m th e f inan c ial state m e nts

to ass e ss d if f e re nt d im e n sio n s o f a c o m pan y ’ s p e rf o rm anc e . T h e se inc lud e :

Hello
● Liquidity Ratios – e .g., C urre n t Ratio an d Q uic k R atio

Hello

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● Profitability Ratios – e .g., R O E , RO A , N e t P ro f it M a rgin

● Solvency Ratios – e .g., De b t- to -Eq uity , In te re st C o v e rage R atio

● Efficiency Ratios – e .g., A sse t T urn o v e r, R e c e iv a b le s T urn o v e r

Fo r Inf o sy s, w h ic h o p e rate s in a c ap ital- light , se rv ic e -o rie nte d e n v iro nm e n t, c e rtain ratio s

suc h as R O C E, C urre n t R atio , an d Inte re st Co v e rage ho ld sign if ic ant v alue . T h e c o n sist e nt

an aly sis o v e r the FY 2 0 2 1 – 2 0 2 5 p e rio d allo w s tr e nd id e n tif ic atio n and b e n c hm ar king.

1.3 Importance in the Corporate World

Ra tio analy sis sup po rts:

● In v e sto rs d e c id ing o n b uy /h o ld /se ll ac tio ns

● C re d ito rs e v aluatin g c re d itw o rth in e ss

● M an age rs im p ro v in g o p e ratio nal e f f ic ie nc y

● Re gulato rs and analy sts e n suring transp are n c y

In f o sy s, b e ing liste d o n m ultiple sto c k e x c h ange s and hav ing a w id e b ase o f glo b al c lie nts,

m ust c o n tinuo usly m o n ito r the se m e tric s to align with m ark e t e x p e c tatio n s an d gro w th

go als.

1.4 Academic and Analytical Relevance

T h is p ro je c t c o ntrib ute s to f in an c e re se arc h b y :

● A pp ly in g ac ad e m ic ratio m o d e ls to re al-tim e c o rpo ra te d ata

● E nh anc ing d e c is io n -m akin g to o ls f o r p ro f e ssio nals an d stud e n ts

● O f f e rin g e m piric al v alid atio n to f inan c ial the o rie s an d f o re c astin g m o d e ls

1.5 Objectives of the Study

● T o e v aluate In f o sy s L td .’ s f inan c ial p e rf o rm an c e using ke y ra tio s f ro m FY

2 0 2 1 – 2 0 25

● T o analy z e tre n d s in p ro f itab ility , liq uid ity , e f f ic ie nc y , an d so lv e nc y

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● T o b e nc h m ark In f o sy s against in d ustry p e e rs (e .g., T CS , W ip ro )

● T o id e n tif y f inan c ial str e ngth s an d imp ro v e m e n t are as

● T o pro v id e s trate gic re c o m m e nd atio n s b ase d o n q uantitativ e ins igh ts

1.6 Scope of the Study

● Fo c use d o n se c o n d ary f in anc ial d ata (aud ite d re p o rts, B S E/N S E f ilings)

● C o v e rs f iv e f inan c ial y e a rs (FY 2 0 2 1 – 2 2 to FY 2 0 2 4 – 2 5 )

● Re stric te d to q uantitativ e ratio an aly sis

1.7 Need for the Study

W ith rap id d igital tr ansf o rm atio n and e c o no m ic v o latility (e .g., po st- pan d e m ic re c o v e ry ),

un d e rstand in g In f o sy s’ s f inan c ial re silie nc e is c ruc ial. T his stud y aid s:

● E arly risk d e te c tio n

● P e rf o rm anc e b e n c h ma rking

● S trate gic c o st c o n tro l

● Finan c ial fo r e c astin g

1.8 Limitations of Financial Ratio Analysis

● De pe n d e nt o n ac c ur ac y o f re p o rte d f inan c ials

● In f lue nc e d b y ac c o untin g pr ac tic e s and in f lat io n

● E x c lud e s qualitativ e asp e c ts (le ad e rship , in no v atio n )

● H isto ric al n ature limits fut ure p re d ic tab ilit y

1.9 Research Justification

A s Inf o sy s s c ale s ne w d igital d o m ains (A I, c lo ud , c y b e r se c urit y ), stak e h o ld e rs m ust asse ss

w he t he r its fin anc ial b ac k b o ne su pp o rts suc h strate gic p iv o ts. T h is j ustif ie s a d e taile d

ratio stud y span ning f iv e y e ars.

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1.10 Evolution and Historical Development of Ratio Analysis

Fro m e arly 2 0 th -c e n tury ac c o un tin g to o ls to m o d e rn-d ay pe rf o rm an c e d ash b o ard s, ratio

an aly sis h as e v o lv e d . Inf o sy s, a d ata-d riv e n firm itse lf , lik e ly use s suc h m e tric s in te rnally

f o r K P I m o nito ring and c lie nt pric ing d e c isio n s.

1.11 Relevance in the Post-Pandemic Era

C O V ID -1 9 im pac te d IT se rv ic e s glo b ally . Inf o sy s’ s stro ng liq uid ity an d d e b t-f re e

struc ture play e d a ke y ro le in e n suring se rv ic e c o ntinu ity , e m p lo y e e re te n tio n , and

d iv id e n d p ay m e nts. T h e FY 2 02 1 – 2 2 p e rf o rm an c e sh o ws stro n g re c o v e ry , j ustif y in g

d e e p e r an aly sis.

1.12 Stakeholder Perspective

● Investors: Fo c us o n RO E , E P S , Div id e nd Y ie ld

● Creditors : Lo o k at C urre n t Ra tio , Inte re st Co v e ra ge

● Management: U se o pe ratio na l r atio s to c ut c o s ts

● Regulators : U se s o lv e n c y ratio s f o r risk m o n ito r in g

1.13 Integration with Modern Financial Technologies (FinTech)

In f o sy s itse lf d e v e lo ps platf o rm s f o r fin anc ial se rv ic e s c lie nts usin g A I/M L. T he in te rna l

use o f auto m ate d f inan c ia l d a shb o ard s and p re d ic tiv e ratio m o d e ls stre n gthe n s its e d ge .

1.14 Sector-Specific Ratio Applications

In f o sy s, as a se rv ic e -se c to r c o m p an y , e m ph asiz e s:

● Re v e nue p e r e m p lo y e e

● O p e rating m argin

● Re c e iv ab le s c y c le

● L o w c apital inte n sity (re f le c te d in lo w asse t turno v e r b ut h ig h p ro f it m argins)

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1.15 Connection to Strategic Decision-Making

In f o sy s use s ratio o utc o m e s to :

● De c id e pric ing an d w age po lic ie s

● P lan glo b al e x pan sio ns

● M an age tre asury o p e ratio n s

● O p tim iz e p ro je c t pip e lin e s

1.16 Alignment with Sustainable Financial Practices

S tro ng p ro f itab ility an d z e ro -d e b t e n ab le In f o sy s to inv e st in:

● C arb o n-n e utral o p e ratio ns (ac h ie v e d b y 2 0 2 0 )

● Re ne w ab le e n e rgy

● C SR initiat iv e s

1.17 Role of Ratio Analysis in Risk Management

● E arly w arning v ia ris in g D /E o r f allin g ICR

● P r e -CO V ID , Inf o sy s m ain taine d a Cur re nt Ratio >2 .0 an d IC R >8 0 × , he lp in g w ithsta nd

d e m an d sho c k s

1.18 Financial Ratio Analysis and Capital Market Decisions

In f o sy s’ s c o n siste nt d iv id e n d pay o ut , stab le EP S gro w th, an d stro n g re turn ratio s

attrac t b o th in stitu tio n al and re tail in v e sto rs. Its c re d itw o rthine ss is sup po rte d b y

so lv e nc y m e tric s .

1.19 Ethical Considerations in Financial Reporting

In f o sy s h as a s tro ng r e putatio n f o r c o rp o rate go v e rn an c e . Its r atio s are b ase d o n

tran spare n t, aud ite d f inan c ials f o llo w ing IFRS an d In d ian GA A P .

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1.20 Role in Strategic M&A and Valuation

In f o sy s e v aluate s ac quisitio n s (e .g., W o ngD o o d y , Guid e V isio n ) usin g p ro f itab ility ,

sc alab ility , an d sy ne rgy -b ase d ratio m o d e ls.

1.21 Government and Policy-Level Applications

RB I an d SE B I use In f o sy s’ s f inan c ial d isc lo sure s in trac k ing in d ustry h e alth. Inf o sy s’ s

ratio s are also c o nsid e re d in e c o n o mic in d e x e s an d IT se c to r re po rts .

1.22 Alignment with Academic Learning Objectives

T h is p ro je c t e nh anc e s:

● Finan c ial d ata lite rac y

● A pp lie d ratio c o m putat io n sk ills

● Re al-tim e str ate gic think ing

● In d ustry -sp e c if ic e v aluatio n e x p e rie n c e

1.23 Research Gaps Identified

● C an A I pr e d ic t Inf o sy s ’ s f uture R O E ?

● H o w d o ratio s link to E SG o utc o m e s?

● W hat are p e e r b e n c hm ark s in IT w ith sim ilar m argin s?

1.24 Chapter Summary

T h is c h apte r e stab lish e s th e re le v an c e , struc ture , an d sc o p e o f th e stud y . B y f o c usin g o n

In f o sy s L td . f ro m FY 2 0 2 1– 2 0 2 5 , th is pro j e c t b r id ge s f in anc ial th e o ry an d ind ustry

p rac tic e . T h e ne x t c hap te r w ill e x plo re th e ac ad e m ic lite rature th at un d e rp in s th is

ap pro ac h .

1.5 Objectives of the Study

T h e p re se n t stud y aim s to pe rf o rm a d e taile d f in an c ial ratio an aly sis o f Infosys Company,

f o c using o n th e m o st re c e nt f iv e f in anc ial y e ars. T he spe c if ic o b j e c tiv e s are :

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● T o e v aluate t he pro f itab ility , liquid ity , so lv e nc y , and e f f ic ie n c y o f the se le c te d

c o m p any .

● T o analy z e the tre nd o f f inan c ial p e rf o rm anc e o v e r tim e .

● T o c o m pare the pe rf o rm an c e w ith in d ustry stan d ard s o r pe e r c o m pan ie s.

● T o id e n tif y f inan c ial str e ngth s an d w e akn e sse s that c an guid e m an age rial d e c isio n s.

● T o m ake d ata-d riv e n re c o m m e nd atio ns f o r f inan c ial an d o p e ratio nal im pro v e me n t.

1.6 Scope of the Study

T h e sc o p e o f th is stud y is lim ite d to f in an c ial d ata that is p ub lic ly av ailab le , suc h a s

aud ite d ann ual re po rts pub lis he d b y th e se le c te d c o m pan y . T he f o c us will b e o n th e

c o m p utatio n and in te rpre tatio n o f k e y f inan c ial ratio s an d th e ir im p lic atio n s f o r

stak e ho ld e rs. T h e st ud y w ill no t c o v e r q ualitativ e f ac t o rs suc h as le ad e rsh ip sty le s,

c o rp o rate c u lture , o r m ark e t se ntim e n t, altho ugh th e ir in d ire c t inf lue nc e m ay b e

ac k no w le d ge d w h e re n e c e ssary .

T h e stud y w ill span a p e rio d o f five financial years, pro v id ing e no ug h histo ric al d ata to

id e ntif y pe rf o rm an c e tre nd s an d m e an ingf ul in sights. It w ill also c o n sid e r m ac ro e c o n o m ic

f ac to rs (e .g., inf latio n, inte re st rate s, glo b al tre n d s) that m ay inf lue nc e f in anc ial re sults.

1.7 Need for the Study

In a f ast-p ac e d and c o m pe titiv e glo b al e c o no m y , b usin e sse s ne e d ac c urate an d tim e ly

f inan c ial in sigh ts to surv iv e and thriv e . Fin anc ial ratio ana ly sis h e lps in :

● Early detection of financial distress.

● Setting internal performance benchmarks.

● Improving communication with stakeholders.

● Enhancing transparency and governance.

● Making informed investment or divestment decisions.

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Fo r s tud e nts and y o un g p ro f e ssio nals, m aste rin g f inan c ial ra tio analy sis is e sse n tial to

un d e rstand in g r e al-w o rld b usine s s o p e ratio ns an d gaining e m p lo y m e n t in ro le s re late d to

f inan c e , aud itin g, e q uity re se arc h , b ank in g, an d c o ns ulting .

1.8 Limitations of Financial Ratio Analysis

W hile p o w e rf ul, rat io a naly sis is no t w ith o ut its lim itatio n s:

● It d e pe n d s o n th e accuracy and consistency of financial statements.

● It m ay b e d isto rte d b y accounting policies or inflation.

● Ra tio s d o no t c o nsid e r qualitative factors suc h as le ad e rsh ip o r e m plo y e e m o rale .

● H isto ric al d ata may no t alw ay s re f le c t future prospects.

● Ra tio s ne e d t o b e inte rp re te d in c o n te x t— iso late d num b e rs may b e m isle a d in g.

H e nc e , w hile ratio analy sis p ro v id e s a use f ul starting p o in t, it m ust b e sup ple m e nte d w ith

o th e r to o ls an d c ritic al j ud gm e n t to re ac h c o m p re he n siv e c o n c lusio n s.

1.9 Research Justification

T h is p ro j e c t is j ustif ie d b y th e in c re asing n e e d f o r stro n g analy tic al f ram e w o rk s in

e v aluating b usine ss p e rf o rm an c e . A s c o rp o rate o p e ratio ns b e c o m e m o re c o m ple x an d

inte rlink e d w ith glo b al m arke ts, ratio ana ly sis r e m ain s o n e o f the sim p le st y e t mo s t

e f f e c tiv e m e th o d s f o r f inan c ia l d iag no sis. T his re se arc h w ill no t o nly e nh anc e ac ad e m ic

un d e rstand in g b ut also im pr o v e pr ac tic al d e c isio n- m aking c apab ilitie s.

1.10 Evolution and Historical Development of Ratio Analysis

T h e c o n c e pt o f ratio ana ly sis h as its ro o ts in e arly 2 0 th- c e ntury c o rpo rate ac c o untin g

p rac tic e s, w h e n f in an c ial transp are n c y an d stand ar d iz e d r e po rting b e gan to gain

im po rtan c e . As b us in e sse s e x pa nd e d and inv e stm e nt m ark e ts e v o lv e d , stak e ho ld e rs ne e d e d

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o b j e c tiv e m e th o d s to e v alua te a f irm ’ s f in anc ial s tre ngth an d o p e ratio nal pe rf o rm an c e .

Ra tio analy sis w as b o rn o ut o f th is n e c e ssit y and grad ually f o rm aliz e d into a k e y are a o f

f inan c ial m an age m e nt .

In th e 1 9 2 0s and 1 9 3 0 s, w h e n th e Gre at D e p re ssio n f o rc e d c o m p an ie s a nd b an ks to

re -e v aluate risk m an age m e n t an d f inan c ial d isc ip line , f in anc ial ratio s b e c am e inte gral to

c re d it analy sis. P o st-W o rld W ar II, a s c o m p anie s glo b aliz e d , th e use o f ratio ana ly sis spr e ad

ac ro ss Euro p e , A sia, an d N o rth A m e ric a, f o rm in g th e b asis f o r m any c re d it ratin g an d

f inan c ial re po rting sy ste m s.

T o d a y , w ith d igitize d f in anc ial re p o rting, m o d e rn f in anc ial s o ftw ar e , and re al-tim e

d ash b o ard s, ratio an aly sis h as b e c o m e b o th m o re ac c e ssib le and so p histic ate d . T o o ls lik e

Excel, Tableau, an d Power BI allo w use rs to auto m ate th e c alc ulatio n an d v isualiz atio n o f

ratio s, e n ab ling d e e pe r strate gic insigh ts in le ss tim e .

1.11 Relevance in the Post-Pandemic Era

T h e COVID-19 pandemic d r ama tic ally im pac te d the f in anc ial he alth o f b usine sse s w o rld w id e .

Fro m d isrup te d sup ply c hains to d e c lin in g re v e nue s and risin g d e b t le v e ls, th e glo b al

e c o n o m y w as s e v e re ly te ste d . D uring suc h time s o f un c e rtainty , f in anc ial ratio a naly sis

p ro v e d e sp e c ially v aluab le .

It allo w e d c o m p anie s an d inv e sto rs to :

● E v aluate w hic h b usin e sse s had s uff ic ie nt liq uid ity to w ith stand lo c k d o w ns .

● M o n ito r c h ange s in w o rk in g c ap ita l c y c le s.

● M e as ure p ro f itab ility re silie nc e o r lo sse s d ur in g d e m an d f lu c tuatio n s.

● P r e d ic t b ank ruptc y risk u sin g so lv e nc y ratio s.

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A s the glo b al e c o n o my b e gins to stab iliz e , ratio a naly sis is again at th e fo r e fr o nt, he lpin g

id e ntif y s e c to rs th at are re c o v e rin g an d c o m pan ie s th at h av e ad a pte d suc c e ssf ully . T h is

m ak e s it a timely and practical subject f o r any ac ad e m ic pro j e c t in f in anc e o r b usine ss .

1.12 Stakeholder Perspective

A no th e r re aso n f o r the im p o rtanc e o f ratio an aly sis is its multi-stakeholder relevance:

1.Investors

L o o k at pro f itab ility ra tio s (like RO E an d E P S ) to asse ss re turn o n the ir inv e s tm e nt.

2.Creditors and Banks

U s e liq uid ity a nd so lv e n c y ratio s to d e te rm in e th e ab ility o f the c o mp an y to re p ay lo ans .

3.InternalManagement

A naly z e s e f f ic ie n c y ratio s to re d uc e o p e ratio nal w as tage , im p ro v e as se t utiliz atio n , an d

o p tim ize c ash c y c le s .

4.GovernmentandTaxAuthorities

U s e pro f itab ility and tur no v e r r atio s to m o nito r tax ab le c apac ity an d c o m p lian c e .

5.Competitors

B e n c hm ark th e ir o w n p e rf o rm an c e b y c o m p arin g ratio s o f o the r f irm s in th e sam e in d ustry .

B y c ate ring to m ultip le u se r gro ups, f inan c ial ratio analy sis b e c o m e s a v ital part o f th e

d e c isio n-m ak in g e c o sy st e m w ith in an d aro un d a b usin e ss.

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1.13 Integration with Modern Financial Technologies (FinTech)

M o d e r n f inan c ial analy sis is n o lo nge r lim ite d to trad itio nal m e th o d s. T o d ay , FinTech tools

inte grate A rtif ic ial Inte llige n c e (A I), M ac h in e Le arn in g (M L), an d ad v a nc e d analy tic s in to

f inan c ial ra tio analy sis. T h e se te c h no lo gie s c an :

● P r e d ic t f uture f inan c ia l r atio s usin g re gr e ssio n m o d e ls.

● A uto m atic ally f lag an o m alie s in p e rf o rm anc e .

● C re ate inte rac tiv e d ashb o ard s f o r re al-tim e f inan c ial tra c king.

● E nh anc e f o re c astin g m o d e ls f o r CFO s and strate gists.

A s p art o f a f o rw ard -lo o k in g ac ad e m ic p ro j e c t, it’ s im po rtan t to ac kn o w le d ge h o w the s e

inn o v atio ns are tra nsf o rm ing h o w ratio analy sis is c o nd uc te d an d ap plie d . S tud e nt s

e n te rin g th e f inan c e p ro f e ssio n m ust b e f am iliar w ith the s e to o ls and f ram e w o rks.

1.14 Sector-Specific Ratio Applications

T h e use and in te rp re tatio n o f f in anc ial ratio s v ary b y industry. Fo r e x am ple :

● Manufacturing Firms: Fo c us o n inv e n to ry turno v e r, asse t turn o v e r, and f ix e d ass e t

ratio s.

● Service Sector Companies: Em p hasize p ro f it m argin s, re v e n ue pe r e m p lo y e e , an d

o p e ratin g e f f ic ie nc y .

● Banks and Financial Institutions: U se c ap ital ad e qua c y , N P A ratio s, an d inte re s t

inc o m e r atio s.

● Retail Businesses: P r io ritize liquid ity , q uic k inv e n to ry c y c le s, an d m argin analy sis.

In this stud y , the se le c te d c o m pan y ’ s industry characteristics w ill b e f ac to re d into th e

ratio an aly sis. W hat is a h igh d e b t ratio in o n e se c to r m ay b e no rm al in an o the r. T h us,

un d e rstand in g context is ke y .

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1.15 Connection to Strategic Decision-Making

B e y o n d f in an c ial h e alth m o n it o rin g, ratio an aly sis s upp o rts strategic business decisions. It

h e lp s in:

● P r ic ing strate gy b y und e rst and ing c o st struc ture s.

● E x pan sio n o r ac quisitio n d e c isio ns b ase d o n asse t ut ilizatio n and r e turn ratio s.

● C apital b ud ge ting thro ugh an aly sis o f d e b t-e q uity b alan c e .

● C o st c o n tro l b y m o nito ring o pe ratio n al ratio s lik e e x p e nse s- to -sale s.

T h us, ratio an aly sis is m o re th an ju st a to o l f o r re tro sp e c tiv e asse ssm e n t; it is e qually

im po rtan t in forward planning and strategy formulation.

1.16 Alignment with Sustainable Financial Practices

In th e m o d e rn c o rp o rate w o rld , c o m pan ie s are in c re asingly j ud ge d n o t o nly b y pro f itab ility

b ut also b y sustainability. W hile trad itio n al ratio ana ly sis d o e sn 't in c lud e E nv iro n me ntal,

S o c ial, and Go v e rnan c e (ES G) f ac to rs d ire c tly , it he lp s asse ss w h e the r a c o m pa ny h as th e

financial bandwidth to in v e st in :

● Re ne w ab le te c h no lo gie s

● Gre e n sup ply c h ain s

● S o c ial initiativ e s

● E SG-c o m p lian t inv e stm e n ts

Finan c ial stre n gth— m e asur e d th ro ugh ro b u st ra tio s— is o f te n a pr e re quisite f o r

lo ng-te r m sustainab ility c o m mitm e n ts. T h us, inte gr atin g ratio an aly s is w ith sustaina b ility

m e tric s is an e m e rging tre nd .

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1.18 Role of Financial Ratio Analysis in Risk Management

In m o d e rn b usin e ss strat e gy , risk management is an in te gral p art o f f in an c ial p lan nin g. O n e

o f th e e arlie st in d ic a to rs o f f in an c ial o r o p e ratio nal risk is o fte n f o un d in ratio tre n d s.

C o mp an ie s that ign o re d e c lin in g liq uid ity ratio s o r risin g d e b t le v e ls o f te n f in d

th e m se lv e s unp re p are d f o r e c o n o m ic sho c k s o r in te rn al f in anc ial c rise s.

Ra tio s suc h as:

● Debt-to-Equity Ratio

● Interest Coverage Ratio

● Current Ratio

● Operating Profit Margin

… c an sign al w he th e r th e c o m pan y is o v e r-le v e rage d , f ac in g c ash f lo w issue s, o r str ugglin g

w ith p ro f itab ility . E arly id e ntif ic atio n o f the se risk s thro ugh ratio an aly sis allo w s

c o m p anie s to tak e c o rre c tiv e m e asure s— re n e go tiate d e b ts, re d uc e o pe r atin g c o sts,

re struc tur e f in an c e s, o r raise e q uity c ap ital.

In this w ay , f inan c ial ratio an aly sis d o e sn ’ t jus t asse ss p e rf o rm anc e ; it ac ts as a

preventive tool, h e lp ing o r ganizatio n s to m an age risk s p ro ac tiv e ly .

1.19 Financial Ratio Analysis and Capital Market Decisions

In the c o n te x t o f c apital ma rke ts, w he r e t rillio n s o f rupe e s are trad e d d aily , financial

ratios are indispensable f o r in v e sto rs. Institutio nal in v e sto rs, m utual f und m an age rs,

h e d ge f und s, and re tail inv e sto rs all d e pe n d o n ratio ind ic ato rs like :

● Earnings Per Share (EPS)

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● Price-to-Earnings (P/E) Ratio

● Return on Equity (ROE)

T h e se he lp d e te rm ine w he th e r a sto c k is un d e rv alue d o r o v e rv alue d , w h e the r a c o m p any is

w o rth inv e sting in , an d ho w it c o m pare s to c o m pe tito rs.

Furth e r, c re d it ratin g age n c ie s suc h as C RISIL, M o o d y ’ s, and IC RA u se solvency ratios and

profitability ratios as ke y m e tric s w he n issuin g c re d it sc o re s. T hus , fin anc ial ratio

an aly sis d ire c tly in f lue n c e s the flow of capital in to o r o ut o f a c o m p any — im p ac tin g it s

sh are p ric e , b o rro w in g c ap ac ity , and m ar ke t r e putatio n.

1.20 Ethical Considerations in Financial Reporting

Finan c ial ratio an aly sis, b y n ature , re lie s o n the honesty and accuracy of financial

statements. T h is c re ate s a d e e p lin kage b e tw e e n ratio an aly sis an d ethical financial

reporting. S e v e ral high -pro f ile c o rp o rate f raud s (e .g., En ro n , Saty am , W ire c ard ) sho w c as e d

h o w m anip ulatio n o f fin anc ial state m e n ts le d to m isle ad in g r atio s, w hic h in turn d e c e iv e d

inv e sto rs and d e stro y e d b usin e sse s.

A s a re sult, ratio an aly sis is o n ly as r e liab le as the d ata it's b as e d o n . T h is intro d uc e s th e

im po rtan c e o f :

● T r ansp are nt ac c o untin g stan d ard s (e .g., IFR S, GA A P )

● Re gular aud its and d isc lo sure s

● W histle b lo we r pr o te c tio n

● E thic al c o rpo r ate go v e rn anc e

Fo r a ny ac ad e m ic o r p ro f e ssio nal p ro je c t, it is e sse n tial t o ac k no w le d ge th is d e pe n d e n c y

an d ad v o c ate f o r ethical and standardized financial reporting as a fo u nd atio n f o r

re lia b le analy sis.

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1.21 Role in Strategic Mergers, Acquisitions, and Valuations

Finan c ial ratio ana ly sis p lay s a crucial role in M&A (Mergers and Acquisitions). B e fo r e

ac q uirin g o r m e rgin g w ith an o the r c o m pan y , th e ac q uire r pe rf o rm s due diligence using ratio

an aly sis to asse ss:

● L iq uid ity r isk

● L o ng-te rm so lv e n c y

● A sse t ut ilizatio n e f f ic ie nc y

● Gro w th tre n d s

S im ila rly , in company valuations, ratio s lik e Re turn o n A sse ts (RO A ), E arnin gs B e fo r e

In te re st and T ax e s (E B IT ), an d P ric e -to -Ear nings (P /E) are use d to d e te rm in e th e int rin sic

v alue o f a b usine ss. R atio an aly sis e n ab le s v aluatio n pro f e s sio n als to arriv e at a

data-backed estimate of what a company is worth , an d w he t he r it c an b e a go o d strate gic

f it in a m e rge r.

1.22 Government and Policy-Level Applications

Go v e rn m e nts and r e gulato ry autho ritie s use aggre gate d f in anc ial ratio s ac ro ss se c to rs to :

● A sse ss the h e alth o f in d ustrie s (e .g., auto m o tiv e , ph arm ac e utic als, te x tile s)

● Id e n tif y stre ss s ign als in p ub lic o r p riv ate b ank s

● De te rm in e tax atio n slab s o r se c t o r-w ise po lic y re lie f

● E v aluate im p ac t o f p o lic y c han ge s (GS T , FD I n o rm s, sub sid y re m o v als)

Fo r e x am ple , th e R e se rv e B ank o f In d ia (RB I) mo n ito rs c re d it-d e p o sit ratio s, c apital

ad e q uac y ratio s, an d liq uid ity c o v e rage ratio s o f b ank s as p art o f its m o ne tary po lic y

strate gy .

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T h us, ratio analy sis is n o t o nly c o rp o rate -f o c use d — it has macroeconomic implications a s

w e ll.

1.23 Alignment with Academic Learning Objectives

T h is pro j e c t, c e n te re d o n fin anc ial ratio analy sis, align s c lo se ly w ith postgraduate

learning goals, suc h as:

● Finan c ial state m e nt in te rpr e tatio n

● Qua ntitativ e and qualitativ e f inan c ial e v aluatio n

● Risk asse ssm e n t an d p e rf o rm anc e m e asure m e nt

● A pp lic at io n o f th e o ry to r e al-w o rld c a se s

● Da ta-d riv e n d e c isio n- m aking

It d e v e lo p s c r itic al th in king , e nh anc e s analy tic al skill se ts, an d b rid ge s th e gap b e tw e e n

c lassro o m c o n c e pts and ac tual c o rpo r ate f inan c ial re a litie s.

M o re o v e r, th e inte gratio n o f t his pro j e c t w ith ind us try d ata and p e e r-re v ie w e d lite ratur e

p ro v id e s practical exposure an d m ake s it a stro n g ad d itio n to ac ad e m ic po r tfo lio s o r

p lac e m e n t re sum e s.

1.24 Research Gaps Identified

W hile f inan c ial ra tio a naly sis has b e e n e x te nsiv e ly use d , c e rt ain are as still ne e d ac ad e m ic

e x p lo ratio n :

● H o w w e ll d o f in anc ial ratio s p re d ic t lo ng-te rm gro w th?

● W hat is the ro le o f A I in ratio f o re c asting ?

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● C an f inan c ial ratio tre nd s b e m app e d to E SG (E nv iro nm e n tal, So c ial, Go v e rnan c e )

p e rf o rm anc e ?

● A re se c t o r-spe c if ic b e n c hm ark s av ailab le and stand ard iz e d ?

T h is pro j e c t w ill no t o n ly c alc ulate and in te rpre t ratio s b ut also atte m pt to re f le c t o n

th e se b ro ad e r issue s and pro p o se are as f o r f urth e r re se arc h .

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CHAPTER – II

LITERATURE REVIEW

Chapter 2: Literature Review

T h e lite rature re v ie w o f f e rs an o v e rv ie w o f s c ho larly c o nt rib utio n s an d re al-w o rld

ap plic atio n s re late d to f inan c ial ratio ana ly sis. It b uild s th e f o und a tio n o f this p ro je c t

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b y sh o w c asing ho w d if f e re n t re se arc h e rs, ac ad e m ic ians, an d f inan c ial prac t itio ne r s ha v e

e x p lo re d ratio analy sis ac ro ss ind ustrie s, e c o n o m ie s, and tim e f ram e s. T his c h apte r

c ritic ally e x am in e s the se w o rk s to id e ntif y the e v o lutio n o f c o n c e pts, the im po rtan c e o f

ratio an aly sis in v ario us c o n te x ts, an d e x isting gap s in re se arc h .

2.2 Historical Perspective of Financial Ratio Analysis

T h e ro o ts o f f inan c ial ra tio analy sis c an b e trac e d b ac k to e arly 2 0 th- c e ntury ac c o untin g.

A c c o rd ing to Horrigan (1968), th e e arlie st use o f ratio s in b usin e ss f ina nc e wa s in c re d it

an aly sis, e spe c ially b y b ank s to asse ss b o rro w e r risk. O v e r tim e , it e v o lv e d in to a

d iagno stic to o l f o r in v e sto rs, re gu lato rs, and m an age rs.

Kennedy and Muller (1994) n o te d th at d urin g e c o no m ic c rise s— like the G re at De pre ssio n —

f inan c ial ratio s h e lpe d id e n tif y c o mp an ie s that w e re v uln e rab le to b an krup tc y d ue to

liq uid ity sho rtage s o r p o o r le v e rage m an age m e nt .

2.3 Theoretical Framework

Ra tio an aly sis is gro un d e d in the Financial Statement Analysis Theory, w h ic h asse rts th at

m e an in gf ul inte rp re tatio n o f a c o mp an y ’ s c o n d itio n c o m e s n o t f ro m iso late d f in anc ial

d ata b ut f ro m re latio nsh ip s (ratio s) b e tw e e n d ata p o in ts.

Wild, Subramanyam, and Halsey (2007) e m p hasize d that fin anc ial ratio s o f f e r insigh ts n o t

re ad ily ap pare n t f ro m raw d ata, an d h e lp tr anslate n um e ric al pe rf o r man c e in to b usine s s

p e rf o rm anc e in d ic at o rs.

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Furth e rm o re , Altman's Z-Score Model (1968) app lie d m ultip le f in anc ial ratio s in a w e igh te d

lin e ar m o d e l to p re d ic t b a nk ruptc y , sho w ing th e p o w e r o f ratio an aly sis as a p re d ic tiv e

to o l.

2.4 Profitability Ratios – Prior Studies

P r o fitab ility ratio s lik e Return on Equity (ROE) and Net Profit Margin are so m e o f th e

m o st stud ie d .

● Nissim and Penman (2001) f o un d RO E to b e h ighly c o rre late d w ith sto c k re turn s

o v e r m e d ium - t o lo n g-te rm in v e stm e nt pe rio d s.

● Brigham and Houston (2013) c o n c lud e d th at d e c linin g p ro f itab ility r atio s usually

p re c e d e f inan c ia l in stab ility o r re struc turing ne e d s.

A stud y b y Bhunia and Mukhuti (2011) o n Ind ian m an uf ac turing f irm s sho w e d th at

c o m p anie s w ith c o nsiste n tly h igh RO E an d o pe ratin g pro f it m argin s had m o re stab le m ark e t

v alue o v e r tim e .

2.5 Liquidity Ratios – Prior Studies

L iq uid ity r atio s asse ss th e sh o rt-te rm f in anc ial stre n gth o f a f irm .

● A c c o rd ing to Lazaridis and Tryfonidis (2006), liquid ity play s a c ruc ial ro le in

e n surin g o p e ratio nal c o n tinuity an d av o id in g d e f ault.

● Eljelly (2004) f o un d tha t the c urre n t an d q uic k ratio s s ign if ic an tly in f lue nc e a

f irm ’ s ab ility to c o n v e rt sale s in to c ash an d m e e t o b ligatio ns, e s pe c ially in S M E

se c to rs.

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2.6 Solvency and Leverage Ratios – Prior Studies

T h e se r atio s f o c us o n lo n g-te rm risk .

● Chandrapala and Knápková (2013) e x plo re d h o w D e b t-to -E quity an d Inte re s t

C o v e rage R atio s im p ac t f irm v alue , e sp e c ially in c apital-inte n siv e ind ustrie s.

● Gill, Biger, and Mathur (2011) e stab lishe d th at o v e r-le v e rage d f irm s in th e U .S. te c h

se c to r o ft e n un d e rp e rf o rm e d d ue to e x c e ssiv e inte re st b urd e ns .

A c o m p arativ e stud y in E uro pe b y Titman and Wessels (1988) highlighte d that o ptim al

le v e rage d e p e nd s on asse t tan gib ility an d se c to r n o rm s, sho w ing th e need for

se c to r-s pe c if ic b e nc h m arks .

2.7 Efficiency Ratios – Prior Studies

E ff ic ie nc y ratio s re f le c t asse t man age m e n t and re so urc e o p tim iz atio n.

● Raheman and Nasr (2007) c o n c lud e d tha t highe r in v e nt o ry and ass e t turno v e r

c o rre late w ith b e tte r o p e ratio nal p e rf o rm anc e in th e re tail se c to r.

● Reheul and Van Caneghem (2010) arg ue d that in e f f ic ie n c ie s in re c e iv ab le s

c o lle c t io n o f te n po in t to un d e rly in g sale s c y c le p ro b le m s.

2.8 Industry-Specific Applications

Dif f e re n t ind ustrie s e mp h asiz e d if f e re nt ratio s:

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● Banks f o c us o n c apital ad e quac y , n o n-p e rf o rm ing asse ts , an d lo an -to -d e p o sit ratio s

(B o se , 2 0 0 6 ).

● Retail businesses e m p hasiz e turn o v e r an d m argin rat io s (W e inst e in , 2 0 0 4 ).

● Manufacturing firms re ly he av ily o n f ix e d asse t an d w o rk in g c ap ital ratio s (Alipo ur ,

2 0 1 1 ).

H e nc e , ratio an aly sis m ust b e c o n te x tualize d to m atc h the nature of business.

2.9 Financial Ratio Analysis and Stock Price Behavior

Finan c ial ratio s als o play a ro le in equity valuation and stock market performance.

● Penman and Zhang (2002) f o und that in v e sto rs re sp o nd mo r e to c o nsiste n t

p ro f itab ility ratio s than to f luc tuatin g e arn in gs re p o rts.

● Fama and French (1992) d e v e lo pe d the 3 -f ac to r m o d e l th at inte grate s ratio

ind ic ato rs like Book-to-Market value to e x plain sto c k re tu rns.

2.10 Limitations in Previous Literature

A ltho ugh f inan c ial r atio analy sis ha s b e e n w e ll re s e arc he d , th e re ar e so m e gap s:

● L im ite d stud ie s o n cross-border ratio comparisons d ue to d if f e ring ac c o untin g

stan d ard s.

● In ad e qu ate f o c us o n the integration of AI or Big Data in rat io in te rpre tatio n .

● L ac k o f re se arc h c o nn e c ting ESG performance w ith trad itio n al f inan c ial rat io s.

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2.12 Ratio Analysis in Emerging Markets

W hile m uc h o f t he e arly re se arc h o n ratio an aly sis is b ase d in d e v e lo p e d e c o n o m ie s, mo r e

re c e n t stud ie s f o c us o n its app lic atio n in emerging markets lik e In d ia, B razil, and So uth e ast

A sia. T he se m arke t s o f te n f ac e issue s like f luc tuatin g in f latio n , un stab le c urre n c ie s, an d

re gulato ry c h ange s, w hic h af f e c t f inan c ial in te rpre tatio n .

Chakraborty (2010) e x am in e d In d ian c o m pan ie s an d c o nc lud e d that altho u gh ratio a naly sis

is w id e ly us e d , it r e quire s local calibration d ue to d iff e re nt f in anc ial re po rtin g

stan d ard s (e .g., Ind ian GA A P v s. IFR S). Sim ilarly , Ahmed and Bashir (2016) e x p lo re d ratio

tre n d s in P akistan i te x tile f irm s and f o und th at macro factors lik e e x c han ge ra te

v o latility an d p o litic al in stab ility af f e c t the re liab ility o f lo n g-te rm so lv e n c y ratio s.

In this c o nte x t, ratio an aly sis re m ains use f ul, b u t m ust b e in te rp re te d alongside economic

conditions , w hic h ad d s an o the r lay e r o f analy tic al c o m ple x ity to t his p ro je c t.

2.13 Time-Series vs. Cross-Sectional Analysis

Finan c ial ratio s c an b e ana ly z e d in two m ajo r w ay s:

● Time-Series Analysis: e v aluating a single c o m pan y ’ s pe rf o rm an c e o v e r se v e ral

y e ars.

● Cross-Sectional Analysis: c o m p arin g o n e c o m p any ’ s ratio s w ith tho se o f o the r

c o m p anie s o r in d ustry av e rag e s in th e sam e tim e pe rio d .

White, Sondhi, and Fried (2003) argue d th at time - se rie s analy sis is m o re e f f e c tiv e f o r

id e ntif y ing inte rn al im pro v e me n t o r d e c lin e , w h ile c ro ss-se c tio n al an aly sis he lp s in

b e n c hm ark in g again st p e e rs. Fo r b e st re sults, b o th m e tho d s sho uld b e u se d to ge th e r.

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T h is p ro je c t ad o pts b o th app ro ac he s— s tud y in g Infosys Company’ s pe rf o rm an c e o v e r f iv e

y e ars, an d c o m p arin g k e y ratio s w ith ind ustry stand ard s and c lo se c o m pe tito rs.

2.14 Financial Ratio Analysis in Bankruptcy Prediction

O n e o f the m o st f asc inating use s o f f inan c ial ratio s is in predicting financial distress or

bankruptcy.

● Altman’ s Z-Score c o m b in e s se v e ral ratio s in to o ne f o rm ula to p re d ic t b ank rup tc y

w ith c o n sid e rab le ac c urac y .

● Ohlson’ s O-Score (1980) use s a lo gistic re gre ssio n m o d e l w ith ratio s a s

ind e p e nd e n t v ariab le s to d e te rm in e f ailu re pr o b ab ility .

Re c e nt stud ie s s uc h as Li and Wang (2021) hav e c o m b in e d trad itio n al ratio analy sis w ith

m ac h in e le arnin g m o d e ls to im pro v e pre d ic tiv e ac c ur ac y . T h e im plic atio n is c le ar: ratios are

foundational, but integration with technology enhances results.

T h is asp e c t ad d s v alue to y o ur p ro j e c t— it sho w s ho w trad itio nal to o ls c an sup p o rt modern,

data-driven financial forecasting.

2.15 Integration of Financial Ratios with Non-Financial Indicators

W hile f inan c ial ratio s o f f e r quan titativ e insigh ts, m o d e rn b usine s se s inc r e asin gly

inc o rp o rate non-financial indicators in to p e rf o rm anc e re v ie w s— suc h as c us to me r

satisf ac tio n, e m p lo y e e e ngage me n t, e n v iro n m e nt al im p ac t, and c o rpo ra te go v e rn anc e .

Kaplan and Norton (1996) in tro d uc e d th e Balanced Scorecard, a f ram e w o rk th at c o m b ine s

f inan c ial an d n o n-f in anc ial m e tric s to c re a te a h o listic p e rf o rm anc e d ashb o ard .

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S o me re se arc h e rs, suc h as Eccles and Serafeim (2013), argue th at c o m b ining f in anc ial ratio

an aly sis w ith ESG (Environmental, Social, and Governance) p e rf o rm anc e m e tric s p ro v id e s a

more sustainable performance outlook, e spe c ially in large , glo b al c o m p anie s.

Y o ur pro j e c t c an b rie f ly ac k no w le d ge this e v o lutio n, sh o w in g that financial ratios are

still relevant but work best in conjunction with broader KPIs (Key Performance Indicators).

2.16 Limitations Highlighted in Literature

A n um b e r o f re se arc he rs hav e e m ph asiz e d th e limitations o f ratio an aly sis:

● Dependence on historical data: Ratio s re f le c t p ast pe rf o rm an c e and m ay no t alwa y s

p re d ic t f uture o utc o m e s.

● Window dressing: Co m p anie s c an m an ip ula te e n d -o f -y e ar f igure s (e .g., in f latin g

re v e n ue s, un d e rre po rtin g liab ilitie s) to sho w f av o rab le r atio s.

● Lack of standardization: Dif f e re nc e s in ac c o un ting p o lic ie s ac ro ss c o untrie s an d

ind ustrie s c an m ak e c ro ss -c o m pariso n s d if fic ult.

● Inflation distortion: In h igh -inf latio n e nv iro n m e nts, ratio s m ay re f le c t

artif ic ially high re v e n ue o r ass e t v alue s.

● Over-simplification: S o m e argue th at re ly in g o n sin gle r atio s to jud ge c o m p le x

c o m p anie s m ay m iss un d e rly in g issue s.

Fo r e x am ple , Horrigan (1965) and Bernstein and Wild (1998) b o th p o in te d o ut that ratio s

m ust b e in te rpr e te d alo ngsid e q ualitativ e d ata, m an age m e n t no te s, and m ac ro e c o n o m ic

v ariab le s.

2.17 Literature Gap and Project Justification

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B ase d o n th e re v ie w o f e x isting lite rature , the f o llo w ing gap s an d j ustif ic at io n s f o r y o u r

re se arc h c an b e id e n tif ie d :

● W hile m any stud ie s e x plo re ratio analy sis, most focus on large corporations, w ith

lim ite d an aly sis o f m id -siz e d f irm s o r spe c if ic In d ian se c to r s.

● Fe w stud ie s c o m par e the pre-pandemic and post-pandemic ratio b e hav io r in e m e rgin g

m ark e ts— y o ur p ro je c t c an ad d re ss th at.

● T h e re is limited exploration of sector-specific norms in f inan c ial ratio

inte rp re tatio n in th e In d ian c o n te x t.

● In te gratio n o f ESG scores and digital tools lik e E x c e l d ash b o ard s o r P o w e r B I is still

un d e r-re se arc h e d at th e ac ad e m ic le v e l.

T h is pro j e c t aim s to b rid ge so m e o f th e se gaps b y o f f e rin g a five-year, real-data-based

case study o f an In d ian c o m p any (e .g., M aruti S uzuk i, In fo s y s, T ata M o to rs), app ly in g b o th

c lassic al ratio the o ry and mo d e rn in te rpre tiv e prac tic e s.

2.18 Summary of Literature Insights

T o c o nc lud e , f ina nc ial ratio an aly sis has b e e n s tud ie d ac ro ss d e c a d e s, ge o grap hie s, an d

se c to rs. T he lite ratur e af f irm s that:

● It is a c o re an aly tic a l t o o l in f inan c e .

● It supp o rts in v e stm e nt d e c isio n s, risk an aly sis , and o p e ratio nal im p ro v e m e nts.

● Its ac c urac y an d utility d e pe n d o n pro p e r inte r pre tatio n , in d ustry c o n te x t, an d

d ata tr ansp are nc y .

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CH A P T E R – III

R ES E A R CH M E T H O D O G L Y

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