CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

Financial analysis means the selection, evaluation and interpretation of

financial data along with other pertinent information to assist in

investment and decision making. Decision making is one of the most

important tasks of every company management, to make this decision

every manager need some sort of information, for instance a bank may

need financial information about the financial position, performance of

the company, the liquidity position and the like to grant a loan (Kieso,

Financial Accounting 1992:500)

Financial analysis use for internal and external purpose. For internal

purpose such as employee performance, for example, managers are

frequently evaluated and compensated on the basis of accounting

measures of performance such as profit margin and return on equity. For

external purpose financial statement are useful to parties out side the

firm including short term and long term creditors and potential investors

and evaluate the credit worthiness of borrowers (Kieso, Financial

Accounting 1992:501)

Financial statement analysis is a general term used to describe the

activity of interpreting and using, as opposed to preparing, financial

statements, and primarily accounting data (Kieso, Financial Accounting

1992:501)

In a particular service giving organizations should provide their service

efficiently and effectively so as to bring their customer satisfactions to its

highest level and safeguard their business. Therefore, financial statement

analysis is prepared to predict the amount of expected returns to assess

the risks associated with those, returns to improve the firm's

performance. For the purposed, this study will tries to make financial

statement analysis to identify uses of financial analysis for performance

evaluate in bank of Abyssinia (BOA) (the companies bulletin 2009).

1.2 Statement of the Problem

Financial statement analysis is crucial for maintaining good judgment on

the financial position and future potential and risk associated with it.

Investors who purchase a company's stock expect that they will receive

dividends and that the stock's value will increase, creditors make loans

with the expectation of receiving interest and principal. Both groups bear

the risk that they will not receive their expected returns. They use

financial statement analysis to predict the amount of expected returns

and asses the risks associated with those returns.

If the financial statement is not analyzed and used efficiently it leads to

wrong decision. Due to this reason, users can not evaluate the position of

company, efficiency of operations, potential of investments, the credit

worthiness of borrowing, etc of a firm.

Therefore, it is important to analyze financial statements of the company

in order to determine financial position and performance evaluation.

1.3 . Research Questions

The research try to answer the following research question:-

• How was the performance of the Bank for the past three years?

(from the year 2014-2016). Hence, this study was undertaken

based on the available documents up to the year 2016

• How is the bank in terms of its ability to pay its obligation?

• How is the profitability position of the bank over time?

• What are the financial strength and weakness of the firm?

• Does the firm use it's resource efficiently and effectively?

1.4 Objective of the Study

1.4.1. General Objective

The general objective of the paper is to investigate or review the

performance of bank of Abyssinia for the last three years.

1.4..2. Specific Objective

To assess the ability of the firm to meet it's short term

obligation.

To explore the trends in profitability of the company.

To assess the firm's financial strength and weakness.

To look in to how the firm use financial resources efficiently

and effectively

1.5. Significance of the Study

The study of financial statement analysis is important for profit making

and not for profit making organization. Since Abyssinia Bank is a profit

making organization that gives service in expectation of getting profit and

brings their customer satisfactions to its highest level and safeguards

their business, this paper is important for the management to evaluate

the performance of the firm and help to make decisions based on

liquidity ratio and profitability of the company. It also can be used as a

reference for further study on the subject.

1.6. Scope of the Study

This study is limited to the analysis of a Bank of Abyssinia financial

statement which covers a period from 2007, 2008 and 2009. Under these

methods we used ratio, common size and trend for assessing the

performance.

1.7. Limitation of the Study

When conducting this study, there were constraints of time, money and

to have access to data necessary for the study. Despite all these facts,

the researchers exerted the maximum effort to get valuable and valid

data to outshine or reflect the significance of the paper.

CHAPTER TWO

LITERATURE REVIEW

2.1. Financial Statements

The end product of the accounting process is a set of financial

statements that portrays the company in financial terms. Each relates to

a specific date or covers a specific period of business activity, such as a

year. Managers and investors wants to know about a company financial

statements at the end of the period. Financial statements are intended to

enable outsiders to make decisions and to regulate profit distribution.

The contents of a business enterprise's financial statements have

significant economic consequences on the enterprise, its owners, its

creditors and all other parties who have an economic stake in its

financial strength and profitability. Financial statements that arc

relevant, complete, objective, timely and understandable are perceived by

users to be credible (Harrison and Horngren, 1998:15)

The published finance statements of a corporation consist of the balance

sheet, income statement, statement of cash flows, and accompanying

footnotes. A statement of retained earnings is also included with the

published financial statements, but it only explains the charge in the

retained earnings account on the balance sheet. In order to evaluate the

financial position or an entity it is necessary to understand these

statements and to be aware of their problems and limitations.

1. Balance Sheet: A balance sheet, also called statement of financial

position, presents the financial position of a business enterprise on a

specific date. A balance sheet provides a historical summary of assets,

liabilities and equity.

Assets: are probable future economic benefits obtained or controlled

by a particular entity as a result of past transactions or

events.

Liabilities: are probable future sacrifices or economic benefits

arising from present obligations or a particular entity

to transfer assets or provide services to other entities

in the future as a result of past transactions or events.

Equity: Is the residual interest in the assets or an entity that

remains after deducting its liabilities. In a business

enterprise the equity is the ownership interest.

A balance sheet is basically a historical statement because it shows the

cumulative effective of past transaction and events. Generally, it is

described as a detailed expression f the basic accounting equation.

Assets = Liabilities + Owners' Equity

Assets are costs that have not been deducted from revenue; they

represent expected future economic benefits. However, the right to assets

has been acquired by a business enterprise as a result of past à

transactions. If no future economic benefit is expected from a cost

incurred by the enterprise, the cost in question is not an asset and

should not be included in the balance sheet. Liabilities also result from

past transactions; they are obligations that require settlement in the

future, either by a transfer of assets or by the performance of services.

Implicit in these concepts of the nature of assets and liabilities is the

meaning of owners' equity as the residual equity in the assets of a

business enterprise (Mosich, 1989:167-168)

Equity Capital represents ownership capital as equity shareholders

collectively own the company. They enjoy the rewards and bear the risk

of ownership. However, their liability, unlike the liability of the owner in a

proprietary firm and the partners in a partnership concern is limited to

their capital contributions.

Authorized, issued, subscribed, and paid-up capital: the amount of

capital that a company can potentially issue, as per its memorandum,

represents the authorized capital. The amount offered by the company to

the investors is called the ssued capital (Chandra, 1997.336)

Debt versus equity: To the extent that a firm borrows money, it usually

gives first claim to the firm's cash flow to creditors. Equity holders are

only entitled to the residual value, the portion left after creditors are

paid. The value of this residual portion is the shareholders' equity in the

firm, which is just the value of the firm's assets less the value of the

firm's liabilities.

Shareholders' equity = assets - liabilities

The use of debt in a firm's capital structure is called financial leverage.

The more debt a firm has (as a percentage of assets), the greater is its

degree financial leverage (Ross, 1998: 23)

Market Value versus Book Value: The values shown on the balance

sheet for the firm's assets are book values and generally are not what the

assets are actually worth. For current assets market value and book

value might be somewhat similar because current assets are bought and

converted into cash over a relatively short span of time. In other

circumstances, the two values might differ quite a bit. Moreover, for fixed

assets, it would be purely a coincidence if the actual market value of an

asset (what the asset could he sold for) were equal to its book value.

(Ibid)

2. Income Statement: An income statement is a summary of revenues

and expenses and gains and losses ending with-net income for a
particular period of time. The business and investment community

uses this report to determine profitability, investment value, and

credit worthiness. It provides investors and creditors with information

that helps them predict the amounts, timing and uncertainty of future

cash flows. It helps users of financial statements predict future cash

flows in a number of different ways. First, investors and creditors can

use the information on the income statement to evaluate the past

performance of the enterprise. Second, the income statement helps

users determine the risk of not achieving particular cash flows.

Revenue is the inflow or other enhancement of assets of a business

enterprise or settlements of its liabilities (or a combination of both)

during an accounting period from delivering or producing goods,

rendering services, or other activities that constitute the enterprise's

ongoing major or central operations. Revenue generally results in

increase cash and receivables.

Expenses are outflows or other using up of assets or incurrence of

liabilities during an accounting period from the sale of goods or the

rendering of services.

Income is the residual of revenues which is expenses are deducted.

Income = Revenue – Expense

3. Statement of Cash Flows: The primary purpose of a statement of

cash flows is to provide relevant information about the cash receipts

and cash payments of an enterprise during a period. To achieve this

purpose and to aid investors, creditors, and others in their analysis of

cash, the statement of cash flows reports.

1. The cash effects of an enterprise's operations during a period,

2. Its investing transactions.

3. Its financing transactions, and

4. The net increase or decrease in cash during the period.

Reporting the source, uses, and net increase or decrease in cash IS

useful because investors, creditors and others want to know what IS

happening to a company's most liquid resource. The statement of cash

flows is therefore, useful because it provides answers to the following

simple but important questions:

1. Where did the cash come from during the period?

2. What was the cash used for during the period?

3. What was the change in the cash balance during the period?

Cash receipts and cash payments during a period are classified in the

statement of cash flows into three different activities:

1. Operating activities: Involve the cash effects of transactions that

enter into the determination of net income.

2. Investing activities: Include making and collecting loans and

acquiring and disposing of investments (both debt and equity) and

property, plant, and equipment.

3. Financing activities: Involve liability and owners' equity items

and include a) obtaining capital from owners and providing them

with a return on (and a return of) their investment and b)

borrowing money from creditors and repaying the amounts

borrowed (Kieso, 1992: 208-209)

2.2. Definition of Financial Statement Analysis

Financial statement analysis is the process of examining relationships

among financial statement elements and making comparisons with

relevant information. It is a valuable tool used by investors and creditors,

financial analysts, and others in their decision-making processes related

to stocks, bonds, and other financial instruments. The goal in analyzing

financial statements is to assess past performance and current financial

position and to make predications about the future performance of a

company (IM Pandy 1982:500)

2.3. Types of Financial Statement Analysis

Primary types of financial statement analysis are commonly known as

horizontal analysis, vertical analysis, and ratio analysis (IBID P: 208-209)

Horizontal Analysis

When an analyst compares financial information for two or more years

for a single company, the process is referred to as horizontal analysis,

since the analyst is reading across the page to compare any single line

item, such as sales revenues. In addition to comparing dollar amounts,

the analyst computes percentage changes from year to year for all

financial statement balances, such as cash and inventory. Alternatively,

in comparing financial statements for a number of years, the analyst may

prefer to use a variation of horizontal analysis called trend analysis.

Vertical Analysis

When using vertical analysis, the analyst calculates each item on a single
financial statement as a percentage of a total. The term vertical analysis

applies because each year's figures are listed vertically on a financial

statement. The total used by the analyst on the income statement is net

sales revenue, while on the balance sheet it is total assets. This approach

to financial statement analysis, also known as component percentages,

produces common-size financial statements. Common-size balance

sheets and income statements can be more easily compared, whether

across the years for a single company or across different companies (IBID

P: 209)

Ratio Analysis

Ratio analysis enables the analyst to compare items on a single financial

statement or to examine the relationships between items on two financial

statements. After calculating ratios for each year's financial data, the

analyst can then examine trends for the company across years. Since

ratios adjust for size, using this analytical tool facilitates intercompany

as well as intra company comparisons (IBID P: 209)

2.4. Purpose and Objectives of Analyzing Financial

Statements

A sound analysis of financial statements will be crucial for maintaining

good judgment on the financial position and future potential and risk

associated with it. Needless and Powers describes the objectives of FSA

as broadly as the following:-Creditors and investors as well as managers,

use financial statements analysis to judge the past performance and

current position of a company, and also to judge its future potential and
the risk associated with it. Creditors use the information gained from

their analysis to make reliable loans that will be repaid with interest.

Investors use the information to make investments that will provide a

return that is worth the risk. (Mosich, 1989:445)

• Past Performance and Current Position:

Past performance is a good indicator of future performance. Therefore, an

investor or creditor looks the trend of past revenues, expenses, net

income, cash flow, and return on investment not only as a means for

judging management past performance but also as a possible indicator of

future performance. In addition, an analysis of current position will tell,

for example, what assets the business owns and what liabilities must be

paid, It will also tell what the cash position is, how much debt the

company has in relation to equity, and what levels of inventories and

receivables exist. Knowing a company's past performance and current

position is often important in achieving the second general objective of

financial analysis

• Future Potential and Risk Associated with it:

Information about the past and present is useful only to the extent that it

bears on decisions about the future. An investor judges the potential

earning ability of a company because that ability will affect the market

price of the company's stock and the amount of dividends the company

will pay. A creditor judges the potential debt-paying ability of the

company.

The risk of an investment or loan depends on how easy it is to predict

future profitability or liquidity.

Financial statement analysis is a judgmental process. One of the primary

objectives in identification of major changes (turning points) in trends,

amounts, and relationships and investigation of the reasons underlying

those changes. Often a turning point may signal an early warning of a

significant shift in the future success or failure of the business. The

judgment process can be improved by experience and the use of

analytical tools.

The interpretation and evaluation of financial statement data require

familiarity with the basic tools of financial statement analysis. The

accountant's function is twofold:

1. To measure economic events and transactions, and

2. To communicate economic information about them to interested

parties.

But communication in accounting means more than just preparing the

reports. Communication presumes understanding, and to promote

understanding accountants must also analyze and interpret financial

statements.

Analysis is used to find answers about the "why" questions in depth. In

looking at performance and present position the financial analyst seeks

answers to two questions. These are what is the company's earning

performance and is the company sound financial condition.

Erich A. Herfet (1991) states three objective of financial analysis

1. The interpretation of financial information: It involves

judgmental interpretation of the financial statements and other

financial data about a company for purposes of assessing and

projecting its performance and value.

2. The use of comparative data: Are the essential part of financial

analysis as they help put judgments about a particular company or

business in perspective.

3. Market analysis: Involves the study and projection of the pattern

of share prices of the company and its competitors relative to the

stock market trends.

It is here that financial analysis becomes a bridge between published

financial statement reporting accounting performance and market trends

reflecting the economic value of a company. The analyst focuses on the

value derivers behind the market value of the shares, which are basic

economic variables like cash flow generated relative cost effectiveness of

the business. (Ibid)

2.5. Problems in Financial Statement Analysis

Some or the problems and limitations of financial statement analysis is

discussed blow. The problems in conducting a FSA are Development of

comparative data, Seasonal/cyclical data distortions, differences in

accounting treatment and window dressing.

Developing and Using Comparative Data:- Many large firms operate a

number of different division in quite different industries and in such

cases it is difficult develop meaningful industry averages. This tends to

make FSA more useful for small firms with single product lines than for
large multi product companies. Additionally most firms want to be better

than average (although half will be above and half below the median). So

merely attaining average performance is not necessarily good (Harrison

and Horngren, 1998: 646)

Seasonal/cyclical data distortions:- inflation has badly distorted firms

balance sheets. Further reported profits are affected because past

inflation affects both depreciation charges and the cost of inventory

include in the cost of good sold. Thus a FSA for one firm over time or a

comparative analysis of firms of different ages which use different

accounting methods must be interpreted with caution and judgment.

(Ibid)

Differences in accounting treatment:- different accounting practices

can he distort ratio comparisons. For e.g. there are four commonly used

inventory valuation methods: SI, FIFO, LIFO and W A during inflationary

periods. LIFO produces a higher CGS and a lower EI valuation than do

the other methods of course no problem would occur if firms being

compared used the same accounting policies. Fortunately, most firm's in

a given industry normally do use similar procedures. Other accounting

practices can also create distortions like non capitalized lease.

Window dressing:- Firms sometimes employ window dressing to make

their financial statements look better to analysts. If a company record

checks received as cash but it record checks written as current liabilities

other than as deductions from cash. And also firms may resort to

window dressing to project a favorable financial picture. E.g., a firm may

prepare its balance sheet at a point when its inventory is very low. As a

result it may appear that the firm has a very comfortable liquidity

position and a high turnover of inventories. When window dressing of

this kind is suspected, the (Financial Analysis) FA should look the

average level of inventory over a period of time and not the level of

inventory at just point of time.

Financial statement analysis is limited on several dimensions. GAAP and

its underlying accounting conventions and measurement rules and

principles, present some limits. Managers often have the ability to select

favorable accounting methods. They can make choices as to the timing

for reporting favorable or unfavorable results. A close reading of the

notes may indicate where some of these choices have had an impact on

the financial ratio. However may of these managerial choices will not be

revealed to external users of financials statements. Investors, in

particular, must rely on independent accounts assessment of the

suitability of management's accounting choices.

A second major limitation of financial statement analysis concerns the

"what's missing factor. Many major factors affecting profitability and

survival of the firm are just not included in accrual accounting not in the

financial statement.

A third concern in financial statement analysis that "real" events are

often hard to distinguish from the effects of alternative accounting

methods or principles. By focusing more on cash flow the investor or

other analyst can identify cases where financial reports based on accrual
accounting may diverge from the cash flows or inducted reflect other

pertinent economic events.

Fourth and final limitation of financial statement analysis concerns

predictable. The past may not be a reliable indicator of the future. Stable

trends may be reversed tomorrow; financial statements are just one of

the important inputs that the investor must use as a basis for investing

decisions. (F. Brigham, 1996: 639-641)

2.6. Financial Ratio Analysis

Ratio analysis is the, starting point in developing the information desired

by the analyst. Financial ratios are usually expressed in percent or

times. These are designed to help one evaluate a financial statement.

Financial ratios are ways of comparing and investigating the relationship

between different pieces of financial information. Also it shows the

financial strengths and weaknesses of the financial performance of a

firm. To evaluate a firm's financial condition and performance, the

financial analyst needs to perform "checkups" on various aspects of a

firm's financial health. (James C-Van Horne, 1998:132)

2.6.1. Nature of Financial Ratio Analysis

Ratio analysis is a powerful tool of financial analysis .A ratio is defined as

"the indicated quotient of two mathematical expressions" and as "the

relationship between two or more things" In financial analysis, a ratio is

used as a benchmark for evaluating the financial position and

performance of a firm. For example consider current ratio. It is calculated

by dividing current assets by current liabilities: the ratio indicates a

quantified relationship between current asset and current liabilities. This

relationship is an index or yardstick which permits a qualitative

judgment to be formed about the firm's ability to meet its current

obligations. It measures the firm's liquidity. The grater the ratio, the

grater the firm's liquidity and vice versa. (Pandey, 1996:104)

2.6.2. Types of Financial Ratio Analysis

Generally companies could present comparative or percentage (common

size) analysis. In comparative analysis the same information is presented

for two or more different dates or periods so that like items may be

compared. Absolute figures or ratios are close to being meaningless

unless compared to another figure. One must have a guide to determine

the meaning of ratios and other measures that are computed. Several

types of comparisons offer insight into the financial position. Using the

past history of firms for comparison is trend analysis. By looking at a

trend in a particular ratio, one sees whether that ratio is falling, rising, or

remaining relatively constant. From this problem is detected or good

management is observed. The other comparison is using industry

averages and comparison with competitors. The analysis of an entity's

financial statements can be more meaningful if the results are compared

with industry average and with result of competitors. (Pandey, 1981:502)

Generally, financial ratios are grouped into five categories.

2.6.2.1. Liquidity Ratios

Liquidity Measure of Short-term solvency ratios are intended to provide

information about a firm's liquidity. The primary concern is the firm's

ability to pay its bills over the short run without undue stress.

Consequently, these ratios focus on current assets and current liabilities.

Liquidity ratios are particularly interesting to short-term creditors.

Because financial managers are constantly working with banks and

other short-term lenders, an understanding of these ratios is essential.

(Ibid)

One advantage of looking at current assets and liabilities is that their

book values and market values are likely to be similar.

There are two commonly used short-term solvency (liquidity) ratios:

1. The current ratio: is defined by dividing current assets by current

liabilities.

Current ratio = Current assets

Current Liabilities

Current assets normally include case, marketable securities, accounts

receivable, and inventories. Current liabilities consists of accounts

payable, notes payable, current maturities of long term debt, accrued

taxes, and other accrued expenses. This ratio tells that the ability of the

firm that will be able to cover the liabilities. (Ibid)

2. The Quick (or Acid-Test) Ratio: inventory is often the least liquid

current asset. It is also the one for which the book values are least

reliable as measures of market value, because the quality of the

inventory is not considered. The quick ratio could be defined as:

Quick, or acid test ratio = Current assets – inventories

Current liabilities
2.6.2.2. Activity Ratio

Activity rations, also called asset management or turnover ratios,

measure how effectively the firm is managing and utilizing its assets.

They indicate how much a firm has invested in a particular type of asset

relative to the revenue the asset is producing.

These ratios are designed to answer this questions: does the total

amount of each type of asset as reported on the balance sheet seem

reasonable, too high, or too low in view of current and projected sales

levels.

These ratios focus on the sales and the inventory, the fixed assets, days'

sale outstanding and the total assets. Ratios included in this category

are:

The Inventory Turnover Ratio: shows how rapidly the inventory is

turning into receivable through sales. It is described by:

Inventory turnover ratio = Cost of sold

Average inventory

Average inventory can be computed as: Beginning + Ending Inventories

And also if cost goods sold is not available inventory turnover can be

Computed as: Inventory ratio = Sales

Average inventories

The Fixed Assets Turnover Ratio: This ratio indicates the extent to which

a firm is using existing property, plant and equipment to generate sales.

It is the ratio of sales to net fixed assets.

Fixed assets turnover ratio = Sales

Net Fixed Assets

The Total Assets Turnover Ratio; Measures the turnover of all the firm's

assts. It indicates how effectively firm uses its total resources to generate

sales and is a summary measure influenced by each of the asset

management ratio.

Total assets turnover ratio = Sales

Total Assets

The Days Sales Outstanding (DSO): Also called the average collection

period is used to appraise accounts receivable. It is the average number

of days an account receivables remain outstanding. It represents the

average length of time that the firm must wait after making a sale before

receiving cash, which is the average collection period. (Ibid)

DSO = Receivables Receivables

Average sales per day Annual Sales /360

2.6.2.3. Financial Leverage Ratios

It is also termed as long-term solvency measures or debt management

ratios. These ratios are intended to address the firm's long-run ability to

meet its obligations, or, more generally, its financial leverage. These

ratios are of interest primarily to bondholders who need some indication

of the measure of protection available to them. In addition, they indicate

part of the risk involved in investing in common stock. The more debt

that is added to the capital structure, the more uncertain in the return

on common stock, there are two types of financial leverage ratios:

component percentage financial and coverage ratios. Component

percentages compare a company's debt with either its total capital (debt

plus equity) or its equity capital. Coverage ratio is reflect a company's

ability to satisfy fixed obligations such as interest, principal, repayment,

lease payments. (Ibid)

Component Percentage Financial Leverage Ratios

The component percentage financial leverage ratios convey how reliant a

company is on debt financing. These ratios compare the amount of debt

to either the total capital of the company or to the equity capital.

1. Debt to Total Assets: The ratio provides the creditors with some

idea of the corporation ability to withstand losses without

impairing the interests of creditors. From the creditor's point of

view a low ratio of debt to total assets is desirable. The lower this

ratio is the more 'buffer' there is available to creditors before the

corporation becomes insolvent.

Debt to total assets = Total Debt

Total Assets or Equity

1. The long term debt to assets ratio: indicates the proportion of

the company's assets that are financed with long term debt.

Long term debt asset ratio = Total debt

Total assets

2. The debt to equity ratio: indicate the relative uses of debt and

equity as sources of capital to finance the company's assets

evaluated using book value of the capital sources. (Ibid)

Total debt to equity ratio = Total debt

Total shareholders equity

Coverage Financial Leverage Ratios

In addition to leverage ratio that use information about how debt is

related to either assets or, there are a number of financial leverage ratios

that capture the ability of the company to satisfy its debt obligations.

There are many ratio that accomplish this, but the two most common

ratios are the time interest coverage ratio and the fixed charge coverage

ratio.

Times interest coverage ratio: Measures how well a company has its

interest obligations covered and it is called the interest coverage ratio.

This ratio is computed by:

Times interest coverage ratio = Income before interest and taxes

Interest charges

The fixed charge coverage ratio expands on the obligations covered and

can be specified to include any fixed charges, such as lease payments

and preferred stock dividends.

Fixed charge coverage ratio = Earnings before interest and taxes + lease payment

Interest + lease payment

Coverage ratios are often used in debt covenants to help protect the

creditors.

2.6.2.4. Profitability Ratios

Profitability ratios indicate how well the enterprise has operated during

the year. These ratios answer such questions as was the net income

adequate? What amount was earned by different equity claimants?

Generally, the ratios are either computed on the basis of sales or on an

investment base such as total assets. Profitability is frequently used as

the ultimate test of management effectiveness.

Profit Margin on Sales:

Computed by dividing net income by net sales for the period:

Profit margin on sales = for the period.

Profit margin on sales = Net income

Net sales

Rate of Return on Assets: is a measure of profit per dollar of assets. It

is computed by dividing net income by total assets.

Rate of Return on Assets = Net income

Total assets

Rate of Return on Common Stock Equity: Is a measure of how the

stockholders fared during the year. Because benefiting shareholders is

the goal of the firm, in accounting sense it is the true bottom line

measure of performance.

Return on Equity = Net Income

Total Equity

2.6.2.5. Market Value Ratios

A final group of ratios is based on information not necessarily contained

in financial statements, the market price per share of the stock.

Obviously, these measures can only be calculated directly for publicly

traded companies.

Price/Earnings Ratio: Shows how much investors are willing to pay per

dollar of reported profits.

Price/Earnings Ratio = Market price per share

Earnings per share

Market/Book Ratio: The ratio of a stock's market price to its book value

gives another indication of how investors regard the company.

Market / Book Ratio = Market price per share

Book value per share

Price/Earnings Ratio: shows how much investor is willing to pay per

dollar of reported profits.

Price/ Earnings Ratio = Market price per share

Earnings per share

Market/Book Ratio: The ratio of a stock's market price to its book value

gives another indication of how investors regard the company.

Market/ Book Ratio = Market price per share

Book value per share

Companies with relatively high rates of return on equity generally sell at

higher multiples of book value than those with low returns.

Earnings per share: The earnings per share figure is one of the most

important ratios used by investment analysis. If no dilute securities are

present in the capital structure, then earnings per share is simply

computed by dividing net income minus preferred dividends by the

average number of shares of outstanding common stock. If, however,

convertible securities, stock options, warrants, or other dilute securities

are included in the capital structure, earnings per common and common

equivalent shares and fully diluted earnings per share figures may have

to be used.
Earnings per share = Net income - preferred dividends

Average shares outstanding

Dilute securities are 'securities that, although they are not common

stock inform, enable their holders to obtain common stock upon exercise

or conversion (Pandey, 1981:502)

2.6.3. Standards of Comparison

The ratio analysis involves comparison for a useful interpretation of the

financial statement. A single ratio in itself does not indicate favorable or

unfavorable condition. It should be compared with some standard.

Standards of comparison may consist of:

2.6.3.1. Trend Analysis

It is the easiest way to evaluate the performance of a firm is to compare

its present ratios with the past ratios. When financial ratios over a period

of time are compared, it is known as the trend (or time series) analysis. It

gives an indication of the direction of change and reflects whether the

firm's financial performance has improved, deteriorated or remained

constant over time. The analyst should not simply determine the change

but, more importantly, he/she should understand why ratios have

changed. The change for example, may be affected by changes in the

accounting policies without a material change in the firm's performance.

2.6.3.2. Industry Analysis To determine the financial condition and performance of a firm, its ratios

may be comparing with average ratios of the industry of which the firm is

a member. This sort of analysis, known as the industry analysis, helps to

ascertain the financial standing and capability of the firm vis-a-vis other

firms in the industry. Industry ratios are important standards in view of

the fact that each industry has its characteristics which influence the

financial and operating relationships (Pandey, 1999: 110-111)

2.6.3.3. Common Size Analysis

Percentage (common size) analysis consists of reducing a series of related

amounts to a series of percentages of a given base. All items in an

income statement are frequently expressed as a percentage of sales; a

balance sheet may be analyzed on the basis of total assets. This analysis

facilitates comparison and is helpful in evaluating the relative size of

items or the relative change in items. A conversion of absolute dollar

amounts to percentages may also facilitate comparison between

companies of different size. Common size analysis could be vertical

analysis or horizontal analysis (Kieso, 1992: 1361-1362)

2.6.4. Use of Financial Ratios Analysis

Ratio analysis is used by three main groups:

1. Managers who employ ratios to help analyze, control and thus

improve their firm's operations.

2. Credit analysts, including bank loan officers and bond rating

analysts, who analyze ratios to help ascertain a company's

ability to pay its debts;

3. Stock analysts, who are interested in a company's efficiency,

risk and growth prospects. Ratio analysis can provide useful

information concerning a company's operations and financial

condition and it involves the methods of interpreting financial

ratios to assess the firm's performance and status. The basic

inputs to ratio analysis are the firm's income statements and

balance sheet for the periods to be examined (Brigham,

2005:463-464)

2.6.5. Limitations of Financial Ratio Analysis

A ratio can be computed precisely, it is easy to attach a high degree of

reliability or significance to it. The reader of financial statements must

understand the basic limitations associated with ratio analysis when

evaluating an enterprise.

As analytical tools, ratios are attractive because they are simple and

convenient. Frequently decisions are based on only these simple

computations involving relationships between financial data. The ratios

are only as good as the data upon which they are based and the

information with which they are compared (Kieso, 1992: 1384-1385)

One important limitation of ratios is that they are based on historical

cost, which can lead to distortions in measuring performance. By failing

to incorporate changing price information, many believe that inaccurate

assessments of the enterprise's financial condition and performance

result (Kieso, 1992: 1384-1385)

CHAPTER THREE

3.1Research Design and Methodology

3.2. Types of Research

Descriptive research is this type research employed through quantitative

research method.
3.3 Types of Data Used

The research has used secondary data sources from various bulletins

reports used by the bank regarding its financial performance.

3.4 Method of Data Collection

The researcher conducted to get required information on the secondary

data which are obtained from the report

3.5 Method of Data Analysis

Having collected the related documents of the three, years 2013- 2016),

from annual report bulletins and other documents, the researchers have

identified, collected and coded the financial data and accordingly put

them into tables describing year’s financial performance by the bank.

Having put these financial figures, the researchers have further

described it into graphs and ratios. Finally these figures have further

explained by words so that the reader could get meaning about the

figures and the ratio.