Financial analysis

Financial analysis is structural and logical way to present overall financial performance of a
financial institution. It’s also help to evaluate and decision making for business operation. In
financial analysis process ratio analysis is the most dominant and logical structure to help
business related stakeholder. Under the financial ratio analysis process there are few
categories to identical area of financial institution. So business stakeholders try to concentrate
to get overall business overview from profitability, liquidity, assets management and
solvency ratio analysis. These ratios not only help to decision making process also
emphasized on risk avoiding and profit raising related factors. To calculate this ratio need to
take quantitative data from bank trading activity and other sources. Financial statement
Analysis involves a comparison of a firm’s performance with that of other firms in the same
line of business, which usually is identified by the firm’s industry Classification. Generally
speaking the analysis is used to determine the firm’s financial position so as to identify its
current strengths and weakness and to suggest action the firm might pursue to take advantage
of the strength and correct any weakness. With respect to the Performances of Bangladeshi
Banking sector, foreign and national experts undertook number of studies. All this studies
provide me a great insight to evaluate bank financial performance by using one of the main
indicators which is ratio analysis the easiest way to evaluate the performance of a firm is to
compare its present ratio with the past ratio. It gives an indicator of the direction of change
and reflects whether the firm’s financial performance has improved, deteriorated or remained
constant overtime.

(Pandey, 2004) James pointed out that financial ratios are used by bankers, creditors,
shareholders and accountants to evaluate data presented do an entity financial statement.
Depending on the results of the evaluations, bankers and creditors may choose to extend or
retract financing and potential shareholders may adjust the level of commitment in a
company. Financial ratios are important tools that judge the profitability, efficiency, liquidity
and solvency of an entity.

Van Horne & WachowiczJr (2005) stated that to evaluate a firm’s financial condition and
performance the financial analyst need to perform “checkups” on various aspects of a firm’s
financial health. A tool frequently used these checkup is a financial ratio. One can employ
financial ratios to determine a firm’s liquidity, profitability, solvency, and adequacy used
financial ratios to show the financial position and performance analysis of Bank.

(Qamruzzaman, 2014) Chowdhury &Ahmed (2009) observed that all the selected private
commercial banks are able to achieve a stable growth of branches, employee, deposit, loans
and advances, net income, earning per share during the period of 2002-2006. They indicate
that the prospect of private commercial banks in Bangladesh is very bright.

With this increase of competition in banking industry, every bank is trying to provide their
customers better services as much as possible to ensure maximum satisfaction (Uppal,2010).

Evaluation of bank’s performance from time to time helps them to know how well they are
actually satisfying their customers and becoming successful. The performance evaluation of
banks has thus taken high priority in the context of Bangladesh (Siddique&Islam, 2001). If
efficiency is gained in the banking sector, it will make the country domestically and
internationally more competitive and capable of generating more income and employment
opportunities. An appropriate evaluation of performance of selected banks requires a range of
financial, operational and economic indicators to be applied (Chowdhury, 2002)

Finally, finance involves analyzing the data contained in the financial statements in order to
provide valuable information for management decisions. In this way, financial analysis is
only one part of the overall function of finance, but it is very important one. A company’s
account and statement contain a great deal of information. Discovering the full meaning
contained in the statement is at heart financial analysis. Understanding how accounts relate to
one another part of financial analysis involve using the numerical data contained in the
company statements to uncover pattern in the activity that may not be apparent on the
surface. The finance function in business involves evaluating economic trends, setting
financial policy, and creating long range plans for business activities. It’s also involve
applying a systems of internal controls for handling of cash, the recognition of sales, the
disbursement of expenses, the valuation in the inventory, and the approval of the capital
expenditures. In addition, the finance function reports on these internal control Systems
through the preparation of the financial statement, balance sheet, and cash flow statement.

Goals of financial analysis: Financial analysts often assess the following element of the firm

 Profitability: its ability to earn income and sustain growth in both the short and long
term. A company’s degree of profitability is usually based on the income statement,
which report on the company’s operations.

 Solvency: its ability to pay its obligation to creditors and other third parties in the
long term.

 Liquidity: its ability to maintain positive cash flow, while satisfying immediate
obligations.

 Stability: the firm’s ability to remain in the business in the long run, without having
to sustain significant losses in the conduct of business. Assessing a company’s
stability requires the use of both the income statement and the balance sheet, as well
as other financial and non financial indicators.
Performance (ratio) analysis:

A ratio analysis is a quantitative analysis of information contained in a company’s financial

statements. Ratio analysis used to evaluate various aspects of a company’s operating and
financial performance such as its efficiency, liquidity, profitability, and solvency. Ratio
analysis is a diagnostic tool that helps to identify problem areas and opportunities within a
company. Ratio analysis is very important for every business, because by calculating ratio
analysis we can understand the business position, business strength and weakness. By
knowing this information, management can takes its necessary steps to organize their goal.
Financial ratios are great way to quick assess a company health before digging deeper into its
financial statements. Price earnings ratios can provide insights into valuations, while debt
coverage ratios can tell investors about potential liquidity risks .When investors and analysts
talk about fundamental or quantitative analysis. Ratios analysis involves evaluating the
performance and financial health of a company by using data from the current and historical
financial statements. The data received from the statements is used to compare a company’s
performance over time to assess whether the company is improving or deteriorating.

While there are numerous financial ratios, ratio analysis can be categorized into five main
group.

liquidity
ratios

coverage solvency
ratios ratios

market profitability
ratios ratios

efficiency
ratios
Profitability ratios: In the report I analyzed the profitability ratios of social islami bank Ltd.

Profitability ratios compare income statement accounts and categories to show a company’s
ability to generate profits from its operations. Profitability ratios focus on a company’s
returns on investment in inventory and other assets. These ratios basically show how well
companies can achieve profit from their operations. Investors and creditors can use
profitability ratios to judge a company’s return on investment based on its relative level of
resources and asset. In other words, profitability ratios can be used to judge whether
companies are making enough operation profit from their asset. In these sense profitability
ratios relate to efficiency ratios because they show how well companies are using their asset
to generate profit.

Profitability ratios are a class of financial metrics that are used to assess a business’s ability to
a generate earning relative to its associated expenses. For most of these ratios, having a
higher value relative to competitor’s ratios or relative to the same ratio from a previous
period indicates that the company is doing well.

Now profitability ratios can be divided into five categories.

net profit
margin

return on net operating

deposit margin

return on return on
asset equity
Net profit margin: Net profit margin or net margin is equal to the net income or profit
divided by total revenue, and represents how much profit each taka of sales generates. Net
profit margin is the ratio of net profit or net income to revenues for a company, business
segment or a product. Net profit margin is typically expressed as a percentage but can also be
represented in the decimal form. The net profit margin illustrate how much of each taka
collected by accompany by a company as revenue translate into profit. The term net profit Is
equivalent to net income on the income statement. Most commonly, investors refer net profit
margin as the net margin and describe it as the net income.

To calculate net profit margin, find the company’s revenue, which comprises all sales, fees or
other money the business has collected through the period. To determine the profits, subtract
operating expenses, cost of goods sold, interest and taxes from revenue. If the business pay
stock dividends, also subtract those payments from revenue when calculating profit, but do
not take common stock dividends into account. Then divide net profit by revenue and convert
it to percentage by multiplying it by 100.

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

The formula of net profit margin: × 100
𝑡𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

4086.32
Calculation of profitability ratio in 2017 (million) =21414.39 × 100

=19.08%

Table of net profit margin

Particulars 2013 2014 2015 2016 2017

Net profit after 2091.11 2563.84 3443.23 3798.07 4086.32

tax

Total operating 15186.16 15718.09 17305.61 19174.34 21414.39

income

Net profit 13.77% 19.41% 19.90% 19.80% 19.08%

margin

Source (social islami bank annual report 2013 to 2017)

 net profit margin

20

15

10

5 percentage

0
2013
2014
2015
2016
2017

Finding from net profit margin: The Net Profit Margin ratio of SOCIAL ISLAMI BANK is
showing an increasing trend. From 2013 to 2015 the Net Profit Margin has increased
incredibly. But from 2016 to 2017 it is increasing but not like the profit margin of 2014 or
2015. In 2017 the profit margin is little bit low than the previous year. Because the difference
between net profit after tax and total revenue is high. On the basis of last five year analysis,
we can say that the overall bank performance is up to the mark. It indicates that bank
performance outcome is up to the mark.

A company with a high net profit margin ratios mean that the company will have more
money to pay operating expenses like salaries, utilities, and rent. Since this ratios measure the
profit from selling inventory.

Net operating margin: operating margin measure how much profit a company makes on a
dollar of sales, after paying for variable costs of production such as wages and raw materials,
but before paying interest and taxes. A company’s operating margin, also known as returns
on sales, is a good indicator of how well it is being managed and how risky it is. it shows the
portions of revenues that are available to cover non operating cost like paying interest which
is why investors and lenders pay close attention to it. Highly variable operating margins are a
prime indicator of business risk. By the same token, looking at a company’s past operating
margin is a good way to gauge whether a big improvement in earnings is likely to last.
Operating margin is calculated by operating profit by its net sales.
 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑣𝑒𝑛𝑢𝑒−𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
The formula of operating margin= × 100
𝑟𝑒𝑣𝑒𝑛𝑢𝑒

21414.39−15248.19
Calculation of net operating margin 2017: ×100
21414.39

=28.79%

(million)

Particulars 2013 2014 2015 2016 2017

Operating 15186.16 15718.09 17305.61 19174.34 21414.39

revenue

Operating 12292.10 11753.80 12455.80 13476.26 15248.19

expense
Operating 2894.06 3964.29 4849.81 5698.08 6166.21
profit

Net operating 19.05% 25.22% 28.02% 29.71% 28.79%

margin

operating margin

30

25

20

15 percentage

10

0
2013 2014 2015 2016 2017
Finding from net operating margin

From the year 2013 to 2017, the performance of social islami bank was increasing in terms of
net operating margin. It has increased significantly from 19.05% in 2013 to 25.22% in
2014.This occur as their operating income was increased more than their operating expenses.
This is a good sign for the bank.

A high operating margin is more favorable compared with a lower ratio because this shows
that the company is making enough from its ongoing operations to pay for its variable costs
as well as fixed costs.

For example, a company with an operating margin ratio 28% means that for every taka of
income, only 28 cents is left over to cover the operating expenses.

Return on equity (ROE): The return on equity ratio or ROE is profitability ratio that
measures the ability of a firm to generate profits from its shareholders investments in the
company. In others words, the return on equity ratio shows how much profit each taka of
common stock holder’s equity generates. So a return on 1 means that every taka of common
stock holders equity generate 1 taka of net income. ROE is also indicators of how effective
management is at using equity financing to fund operations and grow the company. Most of
the time, ROE is computed for common shareholders. Preferred dividends are than taken out
of net income for the calculations. Also, average common stockholders equity is usually used,
so an average of beginning and ending equity is calculated. ROE return on equity is a two
part ratios in its derivations because it brings together the income statement and the balance
sheet, where net income or profit is compared.
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
The formula of ROE is = × 100
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑒𝑞𝑢𝑖𝑡𝑦

1455.25
Calculations of ROE in 2017= 14177.12 × 100

=10.27%

Table of return on equity : (million)

Particulars 2013 2014 2015 2016 2017

Net profit 1220.20 1903.72 2072.59 2292.19 1455.25

after tax

Average 10632.70 11613.40 12546.85 13569.06 14177.12

equity

Return on 11.01% 15.68% 16% 16.16% 10.27%

equity
 18

16

14

12

10
percentage
8

0
2013 2014 2015 2016 2017

Findings about return on equity(ROE)

The return on equity ratio of social islami bank is showing an increasing trend. From 2013 to
2016 the ROE has increased incredibly. But in 2017 it is increasing but not like the ROE of
2013 or 2016. It indicates that bank performance outcome is up to the mark. Investors want to
see a high return on equity ratio because this indicates that the company is using its investor’s
funds effectively. Higher ratios are almost always better than lower ratios, but have to
compare to others companies’ ratios in the industry. Since every industry has different levels
of investors and income, ROE can not be used to compare companies outside of their
industries very effectively.

Return on asset (ROA): return on asset is an indicator of how profitable a company is

relative to its total assets. ROA gives a manager, investors, or analysts an idea as to how
efficient a company’s management is at using its assets to generate earnings. Return on assets
is displayed as a percentage. Since company assets sole purpose is to generate revenue and
product profits, this ratio helps both management and investors see how well the company
can convert its investments in asset into profits. We can look at ROA as a return on
investments for the company since capital assets are often biggest investment for most
companies. In this case, the company invests money into capital assets and the return is
measured in profit.
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
The formula of ROA= 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑠𝑠𝑒𝑡𝑠 × 100

1455.25
Calculations of ROA in 2017 =138174.47

=1.40%

Table on return on equity: (million)

Particulars 2013 2014 2015 2016 2017

Net profit 1220.20 1903.72 2072.59 2292.19 1455.25

after tax

Average 63308.3 76868.75 90056.05 113852.1 138174.47

assets

ROA 1.92 2.47 2.30 2.01 1.05

Source(social islami bank annual report (2013 to 2017)

RETURN ON ASSET
3

2.5

2
PERCENTAGE

1.5

0.5

0
2013 2014 2015 2016 2017
YEAR

Findings about Return on Assets

ROA is the most used profitability ratio. Although social islami bank was a part of banking
industry and its most of the assets come from the debt. A positive return on assets ratio
usually indicates an upward profit trend as well. ROA is most useful for comparing
companies in the same industries use asset differently .it only makes sense that a higher ratio
is more favorable to investors because it shows that the company is more effectively
managing its assets to produce greater amounts of net income. In short, this ratio measures
how profitable a company’s assets are.