FINANCIAL ANALYSIS

Financial analysis, though varying according to the particular interests of the analyst, always
involves the use of various financial statement primarily the balance sheet and income statement.
The balance sheet summarizes the assets, liabilities, and owner’s equity of a business at a point
in time, and thee income statement summarizes revenues and expenses of the over a particular
period f time. A conceptual framework for financial analysis provides the analyst with an
interlocking means for structuring the financing.

7.1 National Bank of Pakistan Ten Years Performance at glance

Years 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
Items
Total
471860 432803 415089 371636 350406 417680 400890 369236 320180 271779
assets
Deposits 395568 362866 349617 316493 294754 273391 254863 235032 208283 170476
Advances 160990 140547 170319 140318 122559 109356 105598 85854 81528 62548
Investment 166196 143525 71759 72609 91486 102356 109485 108206 95649 85094
S,s holder 7046 7842 7233
equity 18134 14279 11959 11378 10358 9987 9203
pre tax (1260) 3081 2799
profit 9009 6045 3016 1023 520 2135 996
After tax -------- ------ -------
profit 4198 2253 1149 461 31 0 0
Earning ------- ----- -------
per share 10.23 5.49 3.08 1.24 0.21 0 0
Return on ---------- ------ -----
assets 2% 1.40% 0.80% 0.30% 0.20% 0 0.00%
No of 1555 1537 1463
Branches 1189 1204 1245 1428 1431 1434 1468
No of 23730 21549 20667
Employees 13272 12195 15163 15351 15541 15785 18096
(Source Annual reports 1998, 2000, 2002, 2003)

From the above table it is very much clear that the NBP performance is going higher and higher
total assets are at the crest in 2003. If we draw a graph this will shows that the graph is upward
trend. Profit is increasing from year to year. NBP decrease the number of its branches and
employees because of automation and large networks of other banks. But this bank can compete
and now NBP is the best bank of year.

7.2 RATIO ANALYSIS

Financial analysis is the process of identifying the financial strengths and weakness of the firm
by properly establishing relation ship between the items of balance sheet and profit and loss
account, in order to make rational decision in keeping with the objective of the organization, for
that purpose the management use analytical tools. To evaluate the financial condition and
performance of the business entity, the financial analyst needs to perform "checkups" on various
aspects of the business financial health.

A tools frequently used during these checkups is a financial ratio analysis, which relates two
piece of financial data by dividing one quantity by the other we calculate ratios because in this
way we get a comparison that may prove more useful than the raw number by themselves. The
business itself and outside providers of capital (creditors and investors) all undertake financial
statement analysis. The type of analysis varies according to the specific interest party involved.
The nature of analysis is depending at the purpose of analyst.

7.3 Parties interested in ratio analysis

7.3.1 Trade creditors

Trade creditors are interested in firm's ability to meet their claims over a very short period of
time. Their analysis will, there fore confine to the evaluation of the firm's liquidity positions.

.7.3.2 Suppliers of long-term debt

Suppliers of long-term debt on the other hand are concerned with firm's long-term solvency and
survival. They analysis the firms profitability over time, its ability to generate cash to be able to
pay interest and repay interest and repay principal and the relationship between various source of
funds. (Capital structure relationship).

Long-term creditors do analyses the historical financial statements but they place more emphasis
on the firm's projected financial statement to make analysis about its future solvency and
profitability.

7.3.3 Investors
Investors who have invested their money in the firms share are most concerned about the firm
steady growth in earning. As such, they concentrate on the analysis of the firm's present and
future profitability. They are also interested in the firms financial structure of the extent it
influence the firms earning ability and risk.

7.3.4 Management.

An organization would be interested in every aspect of the financial analysis. It is their overall
responsibility to see that the resources of the firm are used most effectively and efficiently and
that the firm's financial condition is sound.

So thus management employee financial analysis for the purpose of internal control and to better
provide what capital supplier seeks in financial condition and performance from the business and
from an internal control standpoint, management needs to take financial analysis in order to plan
and control effectively.

7.4 Ratio analysis

Ratio is the comparison between two figures of balance sheet and income statement.

7.4.1 Cash Ratio:

“This ration is obtained by dividing cash by current liabilities / liabilities”.

This ratio shows that the cash is enough for payment of current liabilities or not.

It is calculated as cash Ratio=Cash/current liabilities

Table 3

Year 1997 1998 1999 2000 2001 2002 2003

Cash Ratio 0.118 0.169 0.19 0.21 0.22 0.15 0.134

Graph 1

Cash Ratio

0.25
0.2
0.15
ratio
0.1
0.05 Cash Ratio
0
1997 1999 2001 2003
years

It means that how much cash is available for payment its current liabilities. This ratio of NBP
shows a downward trend. Because of high advances cash is less to cover its current liabilities.

7.4.2 Gross Profit Margin Ratio:

“This ratio shows the profit margin in sales/ revenue”.

This is calculated as.

Gross profit/ interest earned

Table 4

Year 1997 1998 1999 2000 2001 2002 2003

Gross profit margin

% 24.8 27.7 28.9 29.59 39.67 46.6 51.9

Graph2

Gross profit margin%

2003
2001
year

Gross profit
1999 margin%

1997
0 20 40 60
ratio

G. profit margin relates profit of the organization to its sales (interest earned in case of Bank).

From calculation it is very much clear that the gross profit margin ration have upward trend
which shows that how much they using their deposits to earn interest. This show the profit of the
firm relative to its revenue. It is a measure of the efficiency of the firm’s operations too. As it is
clear that the ratio gong high this is the indication of good performance.

7.4.3 Net Profit Margin:

This ratio measure the firm’s profitability of sales/ interest earned after taking account of all
expenses and income taxes.

This ratio can be calculated as:

Net profit margin ration = Net Profit after taxes / interest earned
Table5

Year 1997 1998 1999 2000 2001 2002 2003

Net profit Margin

% 0.2 1.6 1.7 1.55 3.67 3.18 21.6

Graph3

Net profit Margin %

30
20
ratio

Net profit
10 Margin %
0
97

99

01

03
19

19

20

20

year

Explanation: from the calculation and graph it is very much clear that the performance of NBP is
very good. And the trend is upward. It tells us a firm’s net income per rupee of revenue. As the
trend is upward it shows the high profits in revenue per rupee in case of NBP. It is because of
high advances the NBP has given to the people.

7.4.4 Return on Equity:

Dividing profit after taxation by share holder’s equity. ROE compares net profit after taxes to the
Share holder’s Equity.

This ratio is calculated as:

ROE=Profit after taxes/Share holder’s Equity

Table6
 Year 1997 1998 1999 2000 2001 2002 2003

Return on Equity 0.67 5.3 0.2 2.7 6.55 9.4 23.1

Graph4

Return on Equity

30
20
ratio

Return on Equity
10
0
7

03
9

20
19

19

20

year

Explanation: from the calculation it is clear that the ROE Ratio have an upward trend of NBP. It
is because of high net profit they have earned. It tells us the earning power on the shareholder’s
investments. It is because of high investments by NBP and effective expense management.

7.4.5 Return On Assets:

This ratio shows the efficiency of organization that how efficiently utilizes their assets. This ratio
relates profits to assets.

It is calculated as:

Profit after Tax/Total Assets

Table7

Year 1997 1998 1999 2000 2001 2002 2003

Return on assets 0.01 0.16 0.008 0.124 0.225 0.52 0.9

 Return on assets

2003
2001
year

Return on
1999 assets
1997
0 0.5 1
ratio
Graph5

From calculation it is clear that this ration of NBP is going high and high. It shows that NBP
using it’s assets very efficiently. That is why they are earning very high profits. This shows that
how efficiently they investing the assets that’s why they are earning high profits.

7.4.6 Investment deposit Ratio:

This ratio shows the comparison of investments and deposits. This is calculated as.

Investment deposit Ratio=Investment/deposits

Table8

Year 1997 1998 1999 2000 2001 2002 2003

Investment Deposit
ratio 42.9 37.7 31.03 22.94 20.54 39.66 42.01
Graph6

Investment Deposit ratio

50
40
30
ratio
20 Investment
10
Deposit ratio
0
1997 2000 2003
year

Explanation: From above table and graph it is very much clear that NBP are using their deposit
very efficiently. And earning high profits. The ratio has an upward trend, which shows the
performance of NBP is very good. Now it is the retraction from top management to invest 30%
of its deposits. This may reduce its profits. But can be fruitful in long term.

7.4.7 Debit to Equity Ratio:

This ration shows the amount contributed by creditors and shareholders. It shows to what extent
the firm is using borrowed money. It is computed simply dividing the total debt of the fire by its
shareholders equity.

This calculated as.

Total debt/shareholder’s equity

Table9

Year 1997 1998 1999 2000 2001 2002 2003

Debt to equity
ratio 32.42 31.4 30.4 20.9 22.7 28.6 24.5

Graph7

Debt to equity ratio

2003
2001 Debt to equity
year

1999 ratio
1997
0 20 40
ratio

From the table and graph it is clear that this ratio is decreasing which show the high efficiency
of NBP. In 2002 it was high but in 2003 it decreases to 24.5 from 28.6 which is a good sign.
Here the creditors are interested in low ratio. The lower the ratio the high the level of the fire’s
financing that is being provided by the shareholders.

7.4.8 Debt to assets ratio:

This ratio shows that to which extent the organization assets are financed by debit. It is
calculated as.

Total debt/total asset

Table1

Year 1997 1998 1999 2000 2001 2002 2003

 Debt to asset
ratio 0.94 0.944 0.957 0.954 0.92 0.954 0.961

Graph8

Debt ratio

0.98
0.96
0.94
ratio
0.92
0.9 Debt ratio
0.88
1997 1999 2001 2003
year

This ration is directly related to risk high ratio means high risk and low ratio means low risk.
From calculation it is clear that the ratio is decreasing which show low risk. This ratio serves the
similar purpose to the debt to equity ratio. This ratio is high because of more deposits in the
bank, and deposits are the liability of customer on bank

7.4.9 Advances deposit Ratio:

This ratio show that how much efficiently the bank advances the deposits of their customer to
borrower.

It is calculated as.

Advances deposit ratio = Advances/ deposit

Table11

Year 1997 1998 1999 2000 2001 2002 2003

Advances deposits
ratio 0.414 0.399 0.416 0.443 0.487 0.387 0.406

Graph9

Advances Deposits ratio

0.5
0.4
0.3
ratio
0.2 Advances
0.1
Deposits ratio
0
1997 2000 2003
year

From above table and graph it is clear that the ratio is going high. Which means the efficiency on
NBP is good and they use their deposits efficiently in advancing to borrowers. Here high ratio is
required. The next side of the picture is that the people will think that is risky to deposit the
money in the bank.

7.4.10 Assets Turnover Ratio:

The relationship of net sales /revenue to total assets is known as the total asset turnover ratio. It
is calculated as.

Total revenue / total assets

Table12

Year 1997 1998 1999 2000 2001 2002 2003

Assets turnover ratio 0.099 0.097 0.093 0.079 0.075 0.079 1.07

Graph10

Assets turnover ratio

2003
year

2001
1999 Assets turnover
1997 ratio
0 0.5 1 1.5

ratio

Explanation: This ratio shows us the relative efficiency with which a firm utilizes its total assets
to generate revenue. We can see that the ratio is going high and which is a good sign and shows
that NBP is utilizing its assets efficiently.

7.4.11 Price to earning Ratio:

This ratio show the relation ship b/w face price per share and earning per share. This ratio is
calculated as:

Price to earning ratio= face price of share/earning per share

Table13

Year 1997 1998 1999 2000 2001 2002 2003

Price to earning
Ratio 2.4 2.7 47.62 3.17 3.25 1.6 0.97

Graph11

Price to earning Ratio

2003
2001
ratio

1999 Price to earning

1997 Ratio
0 20 40 60

year

As from the above calculations it is clear that the ratio decreased tremendously in 2003, it is
because of the reason that earning per share increased resulting in decreasing price to earning
ratio.

From calculation it is clear that it have a downward slope. It is b/c of increase in earning per
share.

7.4.12 Dividend yield:

Anticipated annual dividend divided by the market price of the stock.

It is calculated as.

Dividend yield =Total dividend/ market price

Table14

Year 1997 1998 1999 2000 2001 2002 2003

Dividend
Yield 0.2 0.1 2.3 3.32 1.63 2.45 0.23

Graph12

Dividend Yield

4
3
ratio 2
1 Dividend Yield
0
1997 2000 2003
year

Year 2000 was best as far as dividend yield is concerned; it was mainly due to the decreased
amount of number of shares outstanding. In year 2001 increase in outstanding shares decreased
dividend yield, but due to increase in total dividend in 2002 it has recovered to 2.45.

From the above table it is clear that the dividend is increasing but in 2003 it is low. It is because
of high market price and low dividend.

7.4.13 Deposit growth Ratio:

This ratio shows the growth rate of deposits.

This is calculated as

Current year deposits- previous year deposits /previous year deposit

Table15
 Year 1997 1998 1999 2000 2001 2002 2003

Deposit
growth ratio 0.08 0.07 0.08 0.07 0.1 0.037 0.09

Graph13

Deposit growth ratio

0.1
0.08
0.06
ratio
0.04 Deposit growth
0.02
ratio
0
1997 2000 2003
year

Explanation: This ratio shows an excellent move from 1997 to 2003. It upward slope which
shows that the people trust NBP and its management that our money is in safe hands. The reason
for this good move is only govt support to this bank.

7.4.14 Advances Growth Ratio:

This ratio shows the growth rate of advances. This is calculated as

Current year advances- previous year advances / previous year advances.

Table16

Year 1997 1998 1999 2000 2001 2002 2003

Advances
Growth ratio 0.23 0.04 0.12 0.14 0.21 -0.17 0.15

Graph14

Advances Growth ratio

0.4

0.2
Advances
ratio

Growth ratio
0
97

99

01

03

-0.2
20

20
19

19

year

Explanation: from calculation and graph it is clear that NBP show a good growth rate in respect
of advances. Only in 2002 it is negative b/c of high advances in 2001 and low advances in 2002.
This shows that NBP is utilizing the deposits efficiently.

The over all performance of NBP is very good. That’s why it is declare the best bank of the year
2003.

7.5 Predicting failure:

Where one wants to lend money to a company that is about to fail. The ability to predict
corporate failure before the event has been the holy grail of financial analysis for move than 50
years. The collapse comes much unsaddled. One a company will be successful and next year it
will be fail. For this a tool is used which is

Z=0.012A+ 0.014B + 0.033C + 0.006D = 0.010E

Where
A = net current assets ÷ total assets.

B = Retained earnings ÷ total assets.

C = Profit before interest and tax ÷ total assets

D = capitulation ÷ total debt

E = Sales ÷ total assets

Now Z score blow 1.8 was an indicator of probable failure, and a score of over 3 was seen as a
clean bill of health the advantage of this approach is that using a combination of several financial
ratios makes it less likely that the result will be affected by manipulation of financial statements.

If the portion of current asset is greater compared with total assets the healthier is short term
position.

If the retained earning is greater the greater is the extent of the company’s self financing. The
profit before tax and interest in the third ratio indicates the contribution of a company’s
profitability toward the end index score. In fourth ratio the investor’s view of the further
potential of the company is set against total debt. The last ratio shows the ability of the company
to use its assets to generate revere.

Predicting failure of NBP - 1998.

Z = 0.012(.86) + 0.014(0.026) + 0.033(0.014) + 0.006(0.13) +0.010 (0.11)

= 0.010 + 0.0004 + 0.0005 + 0.0008 + 0.001 = 0.0129

This shows that the calculation is below 1.8 and it is an indicator of failure
REFERENCES

1 National Bank of Pakistan (2000, 2003) Annual Report.

2 Block, Stanley B and Hirt Geoffrey A (1994). “Foundations Of Financial Management”

7th edition USA: Michael W Junior, p121-148

3. Van Horne James C and JR Wachowicz M. Jhon” Financial management” 11 editions

4. Meigs “Financial Accounting” 11th edition.

5. R.B Hisrich and Peter P Michael “Entrepreneurship” 5th edition.

6. Simons Harry and Smith J.M “Intermediate Accounting” 5th edition.

7. Watson James “Fundamentals of Accounting” 7th edition.

8. Sober P Parey “Advance accounting” 2nd edition .

9. Tarry Franklin “Principles of Management” 8th edition

11. Vause Bob “The Economist “Guide to analyzing companies”. 3rd edition.

WEBSITE:

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