ASSESSMENT OF FINANCIAL RATIO ANALYSIS IN COMMERCIAL

BANK OF ETHIOPIA (CASE STUDY ARBAMINCH BRANCH)

ARBA MINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

A RESEARCH PAPER SUBMITED TO DEPARTMENT OF

ACCOUNTING AND FINANCE FOR THE PARTIA FULFILLMENT OF
THE REQUIREMENT FOR THE BACHELOR OF ARTS DEGREE IN
ACCOUNTING AND FINANCE

BY: ADDISHIWOT SEIFU

EBE/019/11
ADVISOR: WONDEMAGEGNEHU.A (MSc)

June ,2022
ARBA MINCH, ETHIOPIA
 Approval sheet
This is to certify that prepared by Addishiwot Seifu entitled .The role of financial ratio
Analysis in case of Ethiopia commercial bank Arab Minch branch and submitted in partial
fulfillment for requirement for the degree of bachelor art(BA) in Accounting and finance
complies with the regulation of the university and meets the accepted standards with respect to
originality and quality.

Approved by board of examiner

Main Advisor ___________________ Signature________________ Date _____________

Examiner _______________________ Signature ________________ Date_____________

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 Statement of Declaration
I here by that thesis entitled financial ratio analysis .The case of commercial Bank of
Ethiopia Arab Minch Branches is my original work. I have carried out the present study
independently with the guidance and support of the research advisor Wondemagenehu.A (MSc).
Any other contributors or sources used for the study have been duly acknowledged. Moreover
has not been submitted for the award of any Degree program in this or any other institution.

_______________________

Signature

________________________

Name of student

_______________________

University Id Number

_______________________

Date

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 ACKNOWLEDGEMENT
First of all I would like to say thanks to my God who gives me encourage and patience in
completion of this paper. Next, I would like to give my extended gratitude to my advisor
Wondemagenehu.A (MSc) for his constructive suggestions and generals’ assistance from the
preparation final discussion of this paper with frequent follow up with receiving in detail
forwarding constrictive suggestion until the mission of final research report.

I am also very thankful to my family for assist by financial and moral until research complete.
Also, I wish to express appreciation to manager and employees of commercial bank of Ethiopia
Arba minch branch for they supported by giving some necessary information.

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Table of Content

Contents Page
Approval sheet ..................................................................................................................................................................... i

Statement of Declaration..................................................................................................................................................ii

ACKNOWLEDGEMENT .............................................................................................................................................. iii

List of table ...................................................................................................................................................................... viii

List of Abbreviation .......................................................................................................................................................1

Abstract................................................................................................................................................................................ 2

CHAPTER ONE ................................................................................................................................................................ 3

1.1 Background of the study .......................................................................................................................................3

1.2 Statement of the problem ......................................................................................................................................4

1.3 Objective of the study ........................................................................................................................................... 5

1.3.1 General objective ............................................................................................................................................5

1.3.2 Specific Objectives ........................................................................................................................................ 5

1.4 Research Questions ................................................................................................................................................5

1.5 Significance of the study ...................................................................................................................................... 5

1.6 Scope of the study .................................................................................................................................................. 6

1.7 limitation of the study ........................................................................................................................................... 6

1.8 Organization of the paper ..........................................................................................................................................6

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CHAPTER TWO ............................................................................................................................................................... 7

LITERATURE REVIEW ............................................................................................................................................7

2.2 Financial analysis................................................................................................................................................... 7

2.4 Users of financial ratio ..........................................................................................................................................8

2.5 Standard of comparison ........................................................................................................................................ 8

2.6. Financial ratio classification............................................................................................................................... 9

2.7 Importance of ratio analysis.............................................................................................................................. 12

2.8 Limitation of ratio analysis................................................................................................................................13

3.1 Research design ....................................................................................................................................................18

3.2 Target population.................................................................................................................................................18

3.4 Source of data collection ....................................................................................................................................18

3.5 Method of data analysis......................................................................................................................................19

CHAPTER FOUR ...........................................................................................................................................................20

DATA ANALYSIS AND INTERPRETATION OF THE STUDY ....................................................................20

4.1. Background of Respondents .....................................................................................................................20

4.2 Introduction to questionnaires ...........................................................................................................................21

4.2.1 The change of the bank in its profitability............................................................................................. 21

4.2.2 Problems in its performance ......................................................................................................................22

4.2.3 The future prospect of the bank based on past performance ..............................................................22

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 4.2.4 The relationship between liquidity, leverage and ratio in performance of the bank.....................23

4.3.1 Financial ratio policy of the bank .............................................................................................................23

4.3.2 The types of financial ratio that the bank proved........................................................................... 23

4.3.4 Remaining amount of financial ratio if the organization failure to gazer problem .......................24

The financial ratio which has selected from the annual report, to evaluate the performance commercial

bank of Ethiopia in Arbaminch branch are:- ............................................................................................................24

4.4.1 Current ratio of commercial bank of Ethiopia .......................................................................................24

4.4.2 Quick or acid test ratio of commercial bank of Ethiopia .................................................................... 25

4.5 Activity ratio of commercial bank of Ethiopia .........................................................................................26

4.5.1 Current asset turnover of commercial bank of Ethiopia ..................................................................... 26

4.5.2 Fixed asset turnover of commercial bank of Ethiopia .........................................................................27

4.5.3 Total asset turnover of commercial bank of Ethiopia ..........................................................................27

4.6 leverage ratio of commercial bank of Ethiopia ............................................................................................. 28

4.6.1 Debt ratio of commercial bank of Ethiopia ............................................................................................28

4.6.2 Debit equity ratio of commercial bank of Ethiopia ..............................................................................29

4.7 Profitability ratio of commercial bank of Ethiopia ..................................................................................29

4.7.1 Return on equity of commercial bank of Ethiopia ............................................................................... 30

4.7.3 Dividend per share (DPS) commercial bank of Ethiopia ....................................................................31

4.7.4 Dividend payment ratio of commercial bank of Ethiopia ...........................................................32

CHAPTER FIVE .............................................................................................................................................................33

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SUMMERY, CONCLUSION AND RECOMMENDATION ..............................................................................33

5.1 Summaries..........................................................................................................................................................33

5.2 Conclusion .............................................................................................................................................................33

5.3 Recommendation.............................................................................................................................................34

Reference ........................................................................................................................................................................ 1

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List of table
Table 4.1. Back ground information of respondents…………………………………………….20
Table 4.2.1 The change of banks in its profitability……………………………………………..21
Table 4.2.2 Problems in its performance…………………………………………..…………….22
Table 4.2.3 The future prospect of the bank based on its past performance…………….……….22
Table 4.2.4 The relationship b/n liquidity, leverage and activity ratio in performance of bank…24
Table 4.4.1 Analysis of current ratio during 2017-2021………………………………………....24
Table 4.5.1 Analysis of current asset turn over during 2017-2021………………………….…...25
Table 4.5.2 Analysis of fixed asset turn over during 2017-2021……………………………….26
Table 4.5.3 Analysis of total asset turn over during2017-2021…………………………..……..27
Table 4.6.1 Analysis of debt ratio during2017-2021 ……………………………….…………..28
Table 4.6.2 Analysis of debt equity ratio during 2017-2021………………….………….……...29
Table 4.7.1 Analysis of return on equity during 2017-2021…………………………………..…30
Table 4.7.2 Analysis of basic earning power 2017-2021………………………………..……….30
Table 4.7.3 Analysis of dividend per share during 2017-2021……………………….………….31
Table 4.7.4 Analysis of dividend payout during 2017-2021……………………………..……...31

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List of Abbreviation
BEP…………………………………………………….Basic earning power
CA………………………………………………………Current asset
CL………………………………………………………Current liability
CBE…………………………………………………….Commercial bank of Ethiopia
DPS……………………………………………………..Dividend per share
EBIT……………………………………………………Earnings before interest tax
QA……………………………………………………..Quick asset
ROE……………………………………………………Return on equity
CBE……………………………………………………Commercial Bank of Ethiopia

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 Abstract
In most organizations whether manufacturing, merchandising or service rendering there is the
absence of organized information showing the performance and position of each bank they are
computing. This problem leads creditors, investors and with no information about the financial
condition of the bank. The researcher motive to start this study is that since banks have a great
benefit for economy and in facilitating the business facility activities it is essential to conduct the
research and to solve the research and to solve banks problem. This study is conducted on
commercial bank and the main objective of this study is assessing the financial performance and
position of the given bank using its financial statement and to come up with alternative solution
related to its positioning in the bank and its financial performance especially on its profitability,
liquidity and activity ratio. The study uses primary and secondary data that means interview,
questionnaires and financial report. It holds mixed and descriptive method of data analysis
approach by using survey research design. The data would be analyzed based on the financial
ratio analysis. Finally, according to the analysis, to know the liquidity, profitability and activity
ratio of the bank and give recommendations to improve the strength and to minimize the
weakness of the bank.

Key work: - Financial ratio analysis,Profitability, financial performance, Liquidity,

activity ratio

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 CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Financial performance is the process of identifying the financial strength and weakness of the
firm by properly establishing relationship between the items, balance sheet, and profit and loss
account. It helps to predict the firm’s future earnings and dividend from investors starting point.
It also helps to predict the future anticipated condition and more important as starting point for
planning action that will influence on the future case of event. Financial ratios are designed to
show relationship between financial statement account (Brigham and Houston,2009)

Financial ratio is the most frequently and widely used in practice to assess a firm financial
performance with that of other firms of the same institution and as evaluation of trend in the firm
position over time. By doing financial statement analysis it would help the analyst to understand
the performance of the company. The analysis of financial statement is study of establishing
meaningful relationship between various financial factors and figure in financial statement. The
basic financial statement includes balance sheet and income statement which is the indicating
device of profitability and financial soundness of business concern (Brigham and Houston, 2009).

Ratio analysis can be viewed as a primary technique of the analysis of financial statement from
various aspects of business. Financial ratio helps to outline a large volume of financial data into
concise form so it is easy to interpret and conclude the performance and position of the bank.
This study helps to managements identify deficiencies and then to take action to improve
performance. A ratio can be defined as the mathematical or quantitative of two variables or the
relationship between two or more things. Today’s, banks are under a great pressure to perform
and to meet objective of their stockholders. Employees, depositors and borrowing customers as
banking organizations have grown in recent years, more of them will be forced to turn the money
and capital market raise funds by selling stocks and bonds (Phillip R. Davies, 2002).

The commercial bank of Ethiopia (E .C) as incorporated as share company on December 16,1963
proclamation number 207/1955 of October 1963 to take over the commercial banking activity of
the former state bank of Ethiopia under this name, it began operation on January 1,1964 with

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capital of Ethiopia 20,0000,0000 and served for about 16 years. The bank was wholly owned by
the state and operated as an autonomous institution under the commercial code of Ethiopia. The
commercial bank of Ethiopia Share Company and Aids bank had identical objectives, power and
duties. Hence, it was necessary to merge them, in order to eliminate the duplication of efforts and
bring them under a centralized banking structure.consequently, the present day commercial bank
of Ethiopia was established under the proclamation number 184 of august 2,1980.
According to this proclamation, the main objectives of commercial bank are as follows;
1. To extend commercial banking service throughout the country.
2. To encourage the mobilization of saving by making the people aware of the use of banking.
3. They extend loan, credit and all other banking activities to any person for specific purpose and
periods.
4. To spread widely banking habit among the people.(w.w.w.CBE.com)
The commercial bank of Ethiopia is pioneer to introduce modern banking to the country.it is the
first bank in Ethiopia to introduce ATM service for local users. Currently commercial bank of
Ethiopia has more than 8.5 million account holders and it has more than 100 branch stretched
across the country. Commercial bank of Ethiopia Arbaminch branch is one of its branch found in
SNNPR, Gamozone,, Arbaminch town administration.
This branch was established in 1980 E.c as pioneer in the town with the aim of provide service
for society.There is 46employee with its manager in the organization.(w.w.w.CBE/company's
profile)

1.2 Statement of the problem

In developing countries like Ethiopia, there are many growing business organizations. These
business organizations would have to know their financial position, liquidity, market share, and
profit percentage in order to have proper growth. Since knowing financial performance is
important for the management by leaders to evaluate likely hood of collecting information and
help stockholders to forecast future earnings, dividend and stock price. Management of the bank
is relying on accounting information from the financial statement to make various strategic
decisions. To evaluate the banks financial condition and performance the financial analyst needs
to perform check-up on various aspects of the banks financial wealth. Currently, many
commercial banks are operating and expanding their branches continuously. However, their

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financial performance is not organized in order to give information which shows the trend
performance of the bank. This study is aimed to understand the information organized in
financial statement, so that the bank can aware of the strength and weakness of the bank and
forecasting the future growth of the bank and thereby enabling the financial analyst to take
different decisions regarding the operation of the bank. Thus this paper would be conducted to
assess financial performance of commercial bank of Ethiopia in case of branch to help the users
understand the overall operations of the bank

1.3 Objective of the study

1.3.1 General objective

Overall objective of the study would focus on the assessment of the financial ratio analysis in
CBE in the case study of Arbaminch branch

1.3.2 Specific Objectives

 To assess the profitability, liquidity, leverage and activity ratio throughout the year.
 To identify the strength and weakness of the banks financial performance or position
 To see the future perspective of the bank based on its past performance

1.4 Research Questions

The major questions that would be answered by the study are:

1.Does the bank show a change in profitability, liquidity, and leverage and market ratio
throughout the year?
2.Does the bank show a change in financial performance?
3.Does the bank show future perspective based on its past performance

1.5 Significance of the study

Ratio analysis is useful tool for rapid change in technology advancement, information system
competitive market environment and essential to know the organization past performance and
financial position. This ratio analysis compares its past performance by evaluating trend in banks
financial performance over time. This study is used to give information about the bank for the
concerned parties such as: creditors, suppliers and borrowers. It also helps to make proper and
sound decision. Also it would be useful for the management on setting of and selection of

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appropriate financing and operating strategies to be competent in the banking industry. In
addition to that, it helps the researcher to employ their theoretical knowledge in to practice.
Besides, the study and frame work designed to evaluate the financial performance of commercial
banks will be expected to serve as an input for future researchers interested in the financial
industry.

1.6 Scope of the study

The main area of the study focused on assessing the financial performance and position of CBE
by using ratio analysis in Arba minch branch. The researcher will select Arba minch branch
because other areas are far in distance due to this reason, it is difficult to get relevant and reliable
information from others and to minimize cost.

1.7 limitation of the study

The study is restricted for a period of five year and it doesn’t involve both comparing with other
commercial banks which are operating in the banking industry and comparing with the industry
average. Another limitation of this study is that the performance of the bank is measured in
financial terms and non financial measurements of performance are not included. Regarding
analysis of financial statements, the research is made based on ratio analysis. Finally, the study
exclusively depends on the published audited financial data, so it is subject to all limitations that
are inherent in the condensed published financial statements.

1.8 Organization of the paper

The paper is organized in five chapters. The first chapter contains background of the study,
significance of the study, scope and limitation of the study, and organization of the paper. The
second chapter represents review related literature. The third chapter represents methodology of
the study. The fourth chapter includes data analysis and interpretation of the study. And the last
chapter contains summary, conclusion and recommendation.

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 CHAPTER TWO

LITERATURE REVIEW

On this chapter the review related literature had presented of focusing on financial to the topic of

the study. As the beginning finance consists of three interrelated area. Money and capital markets
which deal with security market and financial institution. Investment focuses on the decision of
investors both individuals and institutions as they choose securities for their investment
portfolios. Financial manager or business finance which involves the actual management of the
firm (Brigham E,1995)

2.2 Financial analysis

Financial analysis is the process of identifying the financial strength and weakness of the firm by
properly establishing relationship between the items of the balance sheet, profit and loss account.
Financial ratio can be taken by management of the firm or by the parties outside the owner and
creditors. The nature of analysis will differ depending on the nature of the analyst.

Creditors are interested in the firm ability to meet their claim over a short period of time.
Suppliers of long term debt, on the other hand, analysis concerned with the long term solvency
and survival. They analyze the firm’s profitability over time and its ability to generate cash to be
able to pay interest and to repay principal.(IM PANDY, Eleventh Edition 2015)

Long term creditors; they do analysis on the historical financial statement. But they place more
emphasis on the firm’s project or performance of the financial statement to make analysis about
solvency and profitability of institution.(IM PANDY, Eleventh Edition 2015)

Investors; are who have invested their money in the firm’s earnings. They store more confidence
in those firms that show steady growth in earnings. They concentrate on the analysis of the firm
earning ability and future ability.(IM PANDY, Eleventh Edition 2015)

Management; the firm would be interested in every aspect of the financial analysis. It is the
overall responsibility to see that the researcher of the firms is used more effectively and
efficiently and that the firm’s financial condition is sound (IM PANDY, Eleventh Edition 2015)

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2.3 Ratio analysis
The English word ‘’ratio” comes from Latin. The Latin word has many alternatives in English
language among them are reason, ratio, rational relation. Ratio is defined normally as’’ the
indicated quotient of two mathematical expressions.’’ And indeed, ratio can result from the
division of one number in to another number and as the relationship between two things. An
operational definition of financial ratio is the relationship between values. The relationship
implies that a financial ratio is the result of comparing mathematically two values. This
numerical comparison is important for ratio use indexes; they are used to make quantitative
judgment about the financial wealth of the bank and analysis of the firm by financial manager as
well as interested external parties. To evaluate the firm’s financial performance and conditions
rapidly by, making comparison of firms’ financial performance ratio obtained from the firms.
Financial ratio also represent ready comparison of firms financial performance and condition
overtime as a way of identifying and evaluating performance trend. Ratio analysis requires
considering judgment and direction by the analysts. It serves as future financial and operational
decision. Rules of thumb and other mechanical interpretation produce disastrous decision thus
who are ill-informed about the ambiguity information that may be continue ratios (Phillip R.
Davies, 2009)

2.4 Users of financial ratio

To evaluate the financial conditions and performance of the company the financial analyst uses a
certain yardsticks. These yardsticks are frequently used in ratio or index relating two pieces of
financial data to each other. Analysis and interpretation of various ratios should give experience
skilled analysis. Better understanding of the financial condition and performance of the firm that
will obtain from the analysis of the financial alone. Financial ratio helps to site up the bank as to
trend and relative to others (Van Horn,2002 )

2.5 Standard of comparison

The ratio analysis involves comparison for the useful interpretation of the financial statements.
Single ratio itself does not indicate favorable or unfavorable condition.

Past ratios; those are ratios that are calculated from the past financial statement of the same firm.

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Competitors’ ratio; that is ratio of the same selected firms especially the most progressive and
successfully competitors at the same point of time.

Industry ratios; that are ratios of the industry to which the firm belong and projected ratios
developed using the project or perform financial statement of the same firm

projected ratios, i.e., ratios developed using the projected, or proforma, financial statements of
the same firm(IM PANDY, 2015)

2.6. Financial ratio classification

Financial ratios are most frequently and widely used in practice to assess firms’ financial
performance and condition. The focus if this study is mostly on ascertaining the predictive power
of financial ratio which is investigating in the following areas.

Some writer have contented there are as many as 429 business ratio. But all these ratio need not
be calculate for a particular study. On the bases of the nature of business concerns the
circumstances in which it is operating and the particular question to be answered from the ratio
analysis, certain ratios should only selected. Every attempt should be made to keep the number
of ratios as far as possible to the minimum. This avoids possible confusion in the interpretation
of the ratio. (IM PANDY, Eleventh Edition 2015)

Financial ratio may be classified in various ways

1 On the basis of their importance the ratio may be classified as (1) primary ratio and (2)
secondary ratios. Operating profit before inters and taxes to operating capital employed are
usually described as the primary ratio.Under this category the various related ratios are those of
operating profit to value of production, cost of production to value of production, net sales to
capital employed. The following ratio is usually included in the secondary ratios categories; the
ratio of direct material cost to value of production. Direct material per factory employee output
or work per factory employee, goods for sales per factory employees.

2 On the basis of source that is the financial management from which item are taken to calculate
ratios may be classified into: Balance Sheet ratios, or income statement ratios and combined
ratios Balance sheet ratios are the ratios which express the relationship between items which are
both taken from the Balance Sheet. The current assets to current liabilities (called ratio .Quick
ratio), Debt-Equity ratio etc… may be cited an examples. Income statement ratios are the ratios

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which deal with the relationship between items of the profit and loss account .Examples of thus
ratios are gross profit to sales, net profit to sale, operating ratios.

Combined ratios are the ratios which express the relationship between two figures one of which
is drawn from the balance sheet and the other from income statement.

Its examples are activity ratio or turn over ratios, Return on capital employed, Return on share
holders’ equity.

3 On the basis of nature of items the relationship of which are explained by ratio, the ratios may
also be classified as financial ratios and operating ratios. Financial ratios deal with
nonoperational item which are financial in character. Its examples are current ratio, quick ratio,
equity debt ratio.

The operating ratios explain the relationship between items of operation of the firm. Its examples
are turnover or activity ratios, earning ratios expanses ratios.

4 The most important and commonly adopted classification of ratios is on the basis of the
purpose or function which the ratios are expected to perform. Such ratios are also called fictional
ratios. They include solvency ratios, liquidity ratios, activity ratios and profitability ratio.

Liquidity ratio

Liquidity is the ability of a firm to meet its current or short term obligations when they become
due. Every firm should maintain adequate liquidity. Liquidity is also known as short term
solvency of the firm. The short term creditors of the firm are interested in the short term solvency

or liquidity of the firm. The liquidity position is better known with the help of cash budget and

cash flow statement. But liquidity ratio also provides a quick measure of the liquidity of the firm.
The liquidity ratio or short term solvency ratio established a relationship between cash and
current asset to current liability. A film's liquidity should neither to be too low nor high but
should bead equate. Low liquidity implies the firm's inability to meet its obligations. This will
result in bad credit rating loss of creditor’s confidence or in technical insolvency ultimately
resulting in closure of the firm. A very liquidity position is also bad; it means the firm current
asset is too large in proportion to maturity obligations. It is obvious that idle asset earn nothing to
the firm and in situation of high liquidity, the firm's fund will be unnecessary tied up in current

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asset, if released, can be used to generate profit to the bank. Therefore, every firm should strike a
balance between liquidity and lack of liquidity (GitmanL.j.2005)

Activity ratios

The finance obtained by a firm from its owners and creditors will be invested in asset. These
assets are used by the firm to generate sales and profit. The amount of sales generated and the
obtaining of the profit depends on the efficient management of these assets by the firm. Activity
ratio indicates the efficiency with which the firm manages and used its assets. That is why these
activity ratios are also known as efficiency ratios. They are also called turn over ratios, because
they indicate the speed with which asset are being converted or turn over into sales. This the

Activity or turnover ratio measures the relationship between sales on one side and various asset
on the other. The underlying assumption here is that there exist on appropriate balance between
sales and different assets. A proper balance between sales and different assets generally indicates
the efficient management and uses of the assets

The ratios which measure and indicate the extend of liquidity of the firm and known as liquidity
ratio or short term solvency ratios. They include current ratio, quick ratio or acid test ratio, and
cash position ratio (IM pandey 2002)

Many activity ratios can be calculated to know the efficiency of asset utilization. Total assets
turn over ratios, capital employed turnover, fixed assets turnover ratios are an example of activity
ratios.

Profitability ratios

Every firm should earn adequate profit in order to survive in the immediate present and grow
over a long period of time. In fact the profit is what makes this business firm run. It is described
as the magic eye that mirrors all aspects of the business operations of the firm. Profit is also as a
primary and final objective of the business enterprise. It is also an indicator of the firm efficiency
of operations.

There are different person interested in knowing the profit of the firm. The management of the
firm regards profit as an indication of efficiency and as a measure of the worth of their
investment in the business. To the creditor profit are measures of the margin of safety.

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Employees look at profit as a source of fringe benefit. To the government they act as measure of
the firm tax paying ability and abases for legislative action. To the customers they are a hint for
demanding price cut. The firms constitute a less cumbersome and low cost source of finance for
existence and growth. Finally, to the country profit are an index of the economic progress, the
national income generated and the rise in the standard of the living of the people. Profitability in
related to sales, gross profit margin or gross profit to sales, gross operating margin, net operating
margin and net profit margin or net profit to sales are an example of profitability ratio.

3. Leverage ratio: the process of magnifying the shareholders return through the use of debt is
called financial leverage, financial gearing or trading equity. To judge the long term financial
position of the firm’s financial leverage or capital structure ratios are calculated the long term
solvency of the firm can be examined with the help of the leverage or capital structure
ratios .These ratios indicate the fund provide by owner and creditors. Generally there should be
an appropriate mix of debtor and owner's equity in financing in firm's asset

2.7 Importance of ratio analysis

Ratio analysis is an important and useful technique to check up on the efficiency of an
organization. The management can arrive at an important decision by using ratio analysis. The
ratio is used for expressing the mutual relation to different accounts. In fact, any given data in the
financial data are not important in itself. To make its real importance clear, it is to be expressed
in referring to other figures. With the help of ratio analysis, the big figure or group can be made
short and simple. From these the business activities are made possible to analyze systematically.

Generally, the ratio analysis has the following importance:

Helpful in accessing operating efficiency of the business

The ratio can be used as the measuring role of efficiency. With the help of this, the evaluation of
change during different periods can be performed. In this way the comparative efficiency of
company can be informed

Helpful in measuring financial solvency

Ratios are useful tools for evaluating the liquidity and solvency position of a company. They
point out the liquidity position of an organization to meet its short term and long term obligation.

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Useful in future forecasting

Ratio analysis is a very helpful in financial forecasting and planning. The ratio calculation of past
year works guide for the future.

Helpful in decision making

Ratio analysis is also very helpful for decision making. The information provided by ratio
analysis’s very useful for making decision on any financial activities.

Helpful in corrective action

Ratio analysis can also point out the deficiency of the business so that corrective steps may be
taken accordingly

Helpful in comparing inter-firm performance

Due to inter-firm comparison, ratio analysis also serves as a stepping stone to remedial measure.
It helps management involving future market strategy

Helpful in communication

Ratio is an effective means of communication. Different financial ratios communicate the

strength and the financial standing of the firm to the internal and external parts.

Helpful in cost control

From the use of ratio it is possible to control different costs of the

2.8 Limitation of ratio analysis

The ratio analysis contributed a lot to portray the financial position of a business. But they suffer
from various limitations

Limited use of single ratio

A single ratio in itself is not important. It would not be able to convey anything. For making a
meaningful conclusion, a number of ratios which make confusion to analyst is to be calculated

Difficult to interpret

It is a very difficult task to fix an adequate standard for comparison purpose There are no rules of
thumb for all ratios which can be accept as a norm. It rendered interpretation of the ratio difficult.

Ignored qualitative factor

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Ratio analysis is related to the quantities analysis but not with a qualitative analysis because it is
ignored by ratio analysis

Limitation of accounting recorded

Ratio analysis is related to financial statement .financial statement itself is subject to limitation.
This ratio analysis also suffer from the inherent weakness of the financial statement

Wrong conclusion

The analyst or the user must have knowledge about the concern whose statement have been used
for (internet, google.com)

Personal bias Ratios have to interpret and different people may interpret the same ratio in
different ways. Ratio are means to achieve a particular and but not an end itself.

The banking system: commercial banking

As banks have very different operating structure than regular industrial companies, it stands to
reason that investors are a different set of fundamental factors to consider, when evaluating
banks. This is not meant as an exhaustive or complete list of the financial details an investor need
to consider, when contemplating. loan growth is an important as revenue growth to most
industrial companies .the trouble with loan growth is that it is very difficult for an outside
investor to evaluate the quality of the borrowers that the banking is serving .above average loan
growth can mean that the bank has targeted attractive new market or has a low cost capital base
that allows it to change less for it loan. On the other hand above average loan growth can also
mean that a bank is pricing its money more cheaply, losing its credit standards or somehow
encouraging borrowers to move over there business (by Stephen D Simpson)

Deposit growth as previously discussed deposit are the most common, and almost always the
cheapest source of loan-able fund for banks. Accordingly deposit growth give investor a sense of
how much lending a bank can do .there are some important factors to consider with this number.
First, the cost of this fund is important, a bank this that grows its deposit by offering more
generous rate, is not in the same comparative positions as a bank that can produce the same
deposit growth at lower rate . also ,deposit grows has to be analyzed in the context of loan
growth and the bank management plan for loan growth . Accumulating deposit, particularly at
higher rate , is actually bad for earning if the cannot profitability deploy those funds .

14
Loan /deposit ratio

The loan deposit help asses a bank liquidity, and by extension, the aggressiveness of the banks
management. if the loan /deposit ratio is to high, the bank should be vulnerable to any sudden
adverse change in its deposit bases . Conversely if loan /deposit ratio is too low, the bank is
holding on to unproductive capital and earning less than it should.

Efficiency ratio

The banks efficiency ratio is essentially equivalent to regular companies operating margin, in
that it measures how much the bank pays on operating expense, like marketing and salaries.

Capital ratios

There are a host of ratios that banks regulators and investors use to assess how risk a bank’s
balance sheet is, and the degree to which the bank is vulnerable to unexpected increase in bad
loans. Capital ratio takes banks equity capital and disclosed reserves and divides it by the banks
risk weighted assets whose value is reduced by certain statutory amount, based up on its
perceived riskiness. The capital adequacy ratio is sum of tier one and tier two capital, dividend
by the sum of risk weighted asset. The tangible equity ratio takes the banks equity, subtract
tangible asset goodwill and preferred stock equity and then dividend it by the banks tangible
asset. Although not an especially popular ratio prior to the credit crises. Capital ratio can be
through an proxies for banks margin of error. Now a days, capital ratio also play targeted role in
determining whether the regulators will sign of on acquisition and dividend payment.

Return on equity/Return on asset

Return on equity and asset are well established metrics long used in fundamental analysis across
the wide range of industries. Return on equity is especially useful in the valuation of bank, as
traditional cash follow mode less can be very difficult to construct for financial companies, and
return on equity modules can over similar information.

Credit quality

The importance of credit quality ratios is somewhat self-explanatory. If the banks credit quality
is in decline because of non-performing loan and asset or change offs increases the banks earning
and capital may be at a risk. A no performing loaned is a loaned where payment of interest or
principal are overdue by 90 days or more and it is typically presented as a percentage of

15
outstanding loan. Net charge offs represent the difference in lone that are written of as unlikely
to be recovered in previously written loans.

If overall cost and inflation are increasing then it should be see corresponding increase in sales.
If not, then may need to adjust prizing policy to keep up with costs.

The nature and risk of each revenue source should be analyzed. It is recuing the market share
growing, is their a long term relationship or contact, is there arisk that certain grants or contacts
will not renewed, is their adequate diversity of revenue sources.

Organizations can use this indicator to determine long and short term trends in line with strategic
funding goals for example move towards self-sufficiency and decreasing reliance on external
funding.

Empirical gap

The measurement of bank performance particularly CBs is well researched and has received
increased attention over the past years (Seiford, L. and Zhu, J. 1999). There have been a large
number of empirical studies on commercial bank performance around the world. However, little
has been done on bank performance in Ethiopia.

There are two broad approaches used to measure bank performance, the accounting approach,
which makes use of financial ratios and econometric techniques which incorporates non financial
measurements. An empirical investigation of issues is important because financial ratio analysis.
Furthermore previous research has been focused primarily on qualitative research concerning
data analysis. Munir et al (2008) attempt to compare and rank the financial performance of
public sector banks in Pakistan according to the selected financial indicators. The variables in
study are total assets,advance, deposit, investment, profit before tax, and return on assets. Lastly,
they conclude that the ranking of public sector banks differ as the financial measures or ratios
differ. According to the study done by Hempel et al. (2011) rating of commercial banks based on
financial performance information taken from major rating agencies did not prevent investors
who invested in bank capital from losses during bank failure. In addition to that the study
concludes that at the time of failure the deposit insurance schemes do not cover the full risk of
losing deposit. Nimalathasan, B. (2008) assess and compare the financial performance of
banking sector in Bangladesh by using CAMELS frame work, which involves analysis and
evaluation of the six crucial dimensions of banking operations. CAMELS frame work

16
incorporates five measurement areas namely capital Adequacy, asset quality, management
capability, earnings analysis, and liquidity analysis. Finally they conclude that CAMELS frame
work as a means of performance measures and rating of banks give a comprehensive view in
related with financial performance of commercial banks. Also Tabassum, N. (2010) asses and
analyzes the performance of commercial banks in India using CAMEL Model. It is highlighted
that the position of the banks under study is sound and satisfactory so far as their capital
adequacy, asset quality, management capability and liquidity is concerned. On the other hand
Khalid, A. and Yusuf, M. (2013) had done study in Libya by establishing an objective to
evaluate performance of banks in Libya using return on investment framework as a financial tool.
In this study, the results clearly indicated that return on investment framework is capable of
showing the overall performance of banks. Mabwe.K and Robert.W (2010) investigates the
performance of South Africa’s commercial banking sector by employing financial ratios to
measure the profitability, liquidity and credit quality performance of five large South African
based commercial banks. The study uses ROA, ROE, and cost to income ratio in order to
evaluate the profitability performance and LADST, NLTA, and NLDST in order to evaluate
liquidity performance of banks in South Africa. Besides, it uses loan loss reserve to gross loan as
a variable to measure the asset quality performance of CBs in South Africa. Finally the study
found that the previous variables are good measurement in order to assess and conclude
profitability performance, liquidity performance and asset quality performance CBs in general.
Dejene.M and Asres.A (2008) evaluated the financial performance of Construction and Business
Bank (CBB) of Ethiopia by taking eight years audited annual reports. The study employs asset
utilization ratios, deposit mobilization, loan performance, liquidity ratio, leverage ratio,
profitability ratios, solvency ratios and coverage ratio as a measurement indicator of performance.
The study recommends that timely observation of financial performance measure by responsible
financial experts and remedial actions to the outcomes are two important components for
improvement in financial performance of CBs. As per the researcher knowledge, there is no study
done in CBE Arba minch branch related with assessment of financial performance assessment in current
period .Therefore by taking the above theories in to consideration the researcher try to assess the financial
performance of CBE by taking appropriate ratio measurements from the previous study. The researcher
assess the financial performance CBE Arba minch branch in terms of four performance
measurements ,that the researcher believe, profitability performance, liquidity performance, asset quality
performance, and operating efficiency performance

17
 CHAPTER THREE
RESEARCH METHODOLOGY
This section of the study explains research design, target population, sample and sampling
method source of data collection and method of data collection.

3.1 Research design

The nature of the study would be mixed design. That means the quantitative and qualitative
approach. Quantitative research is the mainly focused on past information and expressed on
terms of numerically or classified by some numerical value. It is based on the measurement of
quantity or amount. The qualitative research is concerned with subjective assessment of attitudes,
opinions and behavior. The study would be use survey research design; survey is useful research
design, when researchers want to collect data or phenomena.

3.2 Target population

The researcher take only those have an experience on financial ratio in Arbaminch Nich sar
branch customer chief officer. The researcher decided to have with branch and general manager
how more experience has concerned the financial affair and employees of the bank 14 are
selected for questioners. This gives mainly for generalizing idea about financial aspect of the
bank.

3.3 Sample and sampling method

It is obvious that involving all population in the study would be make the study difficult to
manage and ensure its reliability. So in order to clear the study, the researcher would be use non
probability sampling techniques that will be judgmental technique( a type of purposive
sampling).The researcher intention to use judgmental technique for the population is due to the quality
of information obtained from the samples. In addition to this, such individuals were being part of top
management and also have sufficient knowledge and experience on financial ratio analysis of the bank.

3.4 Source of data collection

In order to set adequate and relevant data for the study, the researcher would use both primary
and secondary data source. The primary source would use both questioners and interviewing data
collection for more understanding about the study and its collect using personal interview from

18
manager of the bank to collect necessary data about ratio analysis of the bank. The researcher
also use secondary data source to collect information about the final commercial bank of
Ethiopia. It also conducted from different materials, annual report from balance sheet of the bank
and text book.

3.5 Method of data analysis

After collecting the raw data through different ways mentioned above, the data shall be stored in
appropriate way. Then the researcher would analyze the data using qualitative and quantitative
methods and shall be explained in percentage, tabulation, and other interpretation methods, that
show descriptive type of data in order to make research clear and understandable.

19
 CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION OF THE STUDY

This chapter has concerned with data presentation and analysis is that has been collected through
primary and secondary source. The main purpose of this chapter is to analyze data collection
through questionnaires related to financial ratio analysis of commercial bank of Ethiopia in
Arbaminch branch. The questionnaires conducted from commercial bank of Ethiopia employees
and interview for manager. This study mainly concerned with the assessment of financial ratio
analysis. In general, as clearly stated in the study, the collection data by using questionnaires
analyze through qualitative and quantitative research method of data analyzed including table
and percentage were selected in the preceding section of this chapter.

4.1. Background of Respondents

Table 4.1. Back ground information of respondents.
No Item Response Frequency Percent
1 Sex of Male 9 64.28%
respondents Female 5 35.22%
Total 14 100%
2 Age of Below 22
Respondents 22-30 9 64.28%
31-45 5 35.71%
45 and Above
Total 14 100%
3 Year of Stay on Below 2 years 7 50%
Bank 2-4 years 3 21.42%
4-6 years 4 28.57%
Above 6 years
Total 14 100%

Table 4.1 personal backgrounds of respondents’ no1, about the sex of respondents were, 64.28%
of respondents were males and 35.22% of respondents were females. The majorities respondents

20
(employees) of commercial bank of Ethiopia, Arba minch branch are males and only 35.22% of
employees are females. The CBE, Arba minch Branch has low level of women empowerment
and needs empowering women.
Table 4.1 no2, the age of the respondents were, 64.28%of respondents were 22-30 year,35.71%
of respondents were 31-45 year. The majorities of respondents were 22-30 year and minorities of
respondents were age (31-45year). Based on this information CBE of Arba minch Branch many
young employees.
Table 4.1 no3 year of stay in Bank of respondents were, 50% of respondents were stayed below
2 year, 21.42% of respondents were stayed 2-4 year and the remaining 28.57% of respondents
stayed above 4-6 year in Bank. The majorities of respondents are below 2 year and 4-6 year in
Bank and only 21.42% of respondents stayed 2-4 year in Bank. The year of the stay is important
to get more information about financial ratio analysis in Arba minch Branch. This reflects that
the bank has well experienced employees to adapt new technologies related with financial ratio
analysis (Source: questionnaires, 2022).

4.2 Introduction to questionnaires

In this part, the researcher wants to analyze the general information about financial ratio analysis
of CBE Arbamnich branch.

4.2.1 The change of the bank in its profitability

As the data collected from the respondent shows that the change has crucial for profitability of
the bank.

Table 4.2.1 The change of the bank in its profitability

Do you think the bank Frequency percentage

shows change in its
profitability
Yes 14
No
Total 14 100%

Source; survey of question, 2022

21
As shown in above table 100% of the respondent agree that the bank shows a change in
profitability, from the above table , the interference can be drawn 100% the total respondent have
strongly the bank shows a change in its profitability

The bank can change its profitability from time to time by providing different means and service
delivery system in proper time by creating awareness for his customer and attract different
customer to our organization and seeks deposit from customers. since Arba mnich has the best
business center to customers.To borrow and return as per requested time or agreement b/n the
bank and the customer, so this lead to increase the ability of the bank to borrow in response the
customer return it time and creates good relationship between customer and bank leads
increasing liquidity, leverage and market relationship throughout the year.

4.2.2 Problems in its performance

In analysis financial ratio the bank activities are extremely important, but some problems are
there. When there is no customer, there is no foreign exchange in the bank, and imbalance
between the target granted and performance of the bank and market environment stiff
competition between the bank and private banks.

In faced some problems like network system for setting new technology, electricity and density
of customers to governmental banks.

4.2.3 The future prospect of the bank based on past performance

The bank can forecast its feature based on past performance to became high apex in financial
position and other to be world class commercial and computing with other banks in the world.

Table 4.2.3 the feature prospect of the bank based on past performance.

Does the bank show feature prospect based on its past performance? frequency Percentage

Yes 14 100
NO
Total 14 100
Source: - survey question 2022

22
This table shows 14 respondent said that commercial bank of Ethiopia Arbaminch branch as
shows feature prospect by using new technology,

4.2.4 The relationship between liquidity, leverage and ratio in performance of the bank

Do you think there is a relationship Frequency Percentage

between liquidity, leverage and
activity ratio
Yes 14 14
No
Total 14 100
The above table shows
100% have a positive relationship in our organization. Therefore each of them can use in our
organization as the same time for its operation. Our bank target is customer satisfaction on loan
of domestic and foreign export and import, large investors on road, hydroelectric power,
irrigation agriculture, whole seller and there risk.

4.3 Analysis of structured interview question collected from manager of commercial bank of
Ethiopia in Arbaminch branch
In this part researcher posed question for the bank manager about the financial ratio analysis

4.3.1 Financial ratio policy of the bank

As the researcher obtained information from the bank manager of commercial bank of Ethiopia
in Arbaminch branch, commercial bank of Ethiopia has their own financial ratio policy and its
own procedure and policy through internal control, every transaction undertake with the bank
and used to administer and control every asset of this bank.

4.3.2 The types of financial ratio that the bank proved

As information obtain from the manager of commercial bank of Ethiopia in Arbaminch Branch,
the bank has used all types of the ratio that means activity ratio, liquidity, profitability and the
leverage ratio.

4.3.3 The requirement financial ratio has to fulfill to get profit

As information obtained from the manager of commercial bank of Ethiopia Arbaminch branch
the bank get profit by creating awareness to customer and change manual to computerized, then

23
they fill customer need and by giving different service for this customer and attract different

customer to our organization.

4.3.4 Remaining amount of financial ratio if the organization failure to gazer problem
As mentioned above there many financial ratio that test the position of the bank. Moreover we
have reserves which help to overcome an expected problem.

The financial ratio which has selected from the annual report, to evaluate the performance
commercial bank of Ethiopia in Arbaminch branch are:-
a. Liquidity ratio
b. Activity ratio
c. Leverage ratio
d. Profitability ratios

In this study, five years (2017 -2021) financial positioned performance of the organization is
compared and evaluated. The summarized balance sheet and income statement has been
presented as follows

4.4 liquidity ratio; Liquidity ratio indicates relationship between the current asset and current
liabilities or it’s a group of ratio that allows one to assess the firm’s ability to pay of short term
obligation (MI PANDI,2002)
The higher the liquidity ratio, the higher the capacity pays off company’s short term obligation
and vice versa. But extreme accumulation of current asset (very high liquidity ratio) realigning
losing of the company’s profit, because funds are tied up in current asset which one unproductive
is not involved in generating of income. Even if there are varies classifications of ratios,
prominent focus is given for current ratio and quick ratio.

4.4.1 Current ratio of commercial bank of Ethiopia

The current ratio is calculated by dividing current assets expected to be converted in to cash in
the near feature to retain current liabilities of the firm to pay its current obligation without
raising the current asset borrowing and issuing additional shares selling of fixed assets. To
compute current ratio, the formula for current ratio is presented as follows

24
Current ratio= total current asset

Total current liability

In order to know the current ratio, look the following table

Table 4.4.1 analysis of current ratio during 2017/18-2020/21

Year Total current asset Total current liabilities

2017 3,683,068,754 3,341,309,875 1.10
2018 4,783,061,527 4,300,530,344 1.11
2019 7,132,572,134 6,371,267,357 1.12
2020 11,089,440,859 9,752,944,310 1.14
2021 9,022,989,378 8,063,640,435 1.12
Source on computation based on secondary data annual report of commercial bank of Ethiopia

In commercial bank there was higher than 1.10 birr for each one birr current liability. The
implicating of above computed current ratio results in the commercial bank holds sufficient
liquidity assets to matured current liability obligation. This ratio does not indicated the banks
weakens rather than strength because, funds should not be tied for operation having in mind the
need for maintaining of current asset for fulfillment of obligation. There for the bank has the
ability to meet its short term obligation.

4.4.2 Quick or acid test ratio of commercial bank of Ethiopia

The quick ratio or acid ratio is precise measure of liquidity than the current ratio. Inventories
which are tilts liquid of current asset, are excluded from the ratio. The acid test named because it
shows the ability of a firm to meet its current obligation. The formula for computing the quick
ratio presented as follows.

Quick ratio = current asset – inventory

Current liability

The presentation analysis for quick or acid test ratio is different to that of the current ratio which
explained previously. Since the bank has inventory, very figure used in the calculation and
explanation in the present.

25
4.5 Activity ratio of commercial bank of Ethiopia
According to impend,(2002) activity ratio is the ratio help to know how effectively the firm is
managing its asset. Activity ratios are re designed to understand the total amount of each level of
asses as respondent on the balance select seem reasonable. Too high or too low in review of
current and protect income level. A set of ratios are calculated to asset the firm effectiveness in
this part current asset, fixed asset and total asset turnover ratio have used to evaluate awash
banks operating efficiency.

4.5.1 Current asset turnover of commercial bank of Ethiopia

This should the amount of current asset that Commercial bank used to generate income. The
company has to ability to have high income of on current asset. These types of assets comprise
the largest amount of asset section, current asset turnover can be calculated as :-

Current asset turnover= total operating income

Current asset

Table 4.5.1 analysis of current asset turnover during 2017/19-2020/21

Year Total operating Total current Current asset turnover

income asset
2017 283,993,920 3,683,068,754 0.077
2018 382,103,369 4,783,061,527 0.080
2019 215,468,338 7,132,172,134 0.100
2020 927,549,687 11,089,440,854 0.084
2021 686,706,099 9,022,986,375 0.076
Source owns competition based on annual report of commercial bank.

Current asset turnover has been increased steadily over paradise 2017 -2021. The analysis have
been shown the amount of positive grow all the company ability to earn a large amount of
current asset. To generalize current asset turnover of five employees that commercial bank of
Ethiopia generate an income of birr 0.077, 0.080, 0.100,0.084,0.076 for the year 2015- 2019
respectively for 1 birr investment in current asset

26
4.5.2 Fixed asset turnover of commercial bank of Ethiopia
This ratio intended to measure the extent to which the bank is used properly, Plant and
equipment to generate income. The general formula fixed asset turn over shown as follows:-

Total fixed asset turnover=total operating income

Fixed asset

Table 4.5.2 analysis of fixed asset turnover during 2017/18- 2020/21

Year Total operating income Fixed asset Fixed asset turn over
2017 283,993,520 63,389,359 4.45
2018 382,103,369 93,192,385 4.10
2019 715,466,338 147,166,745 4.86
2020 927,549,687 83,192,385 11.15
2021 686,706,099 227,119,664 3.303
Sours, on competition based on annual report of commercial bank of Ethiopia.

As shown in the above data, the bank ability in using its existing properly, plant and equipment
to generate income in the last five years when present as follow. commercial bank of Ethiopia
generating income of 4.45, 4.10, 4.86,11.15 and 3.30 3 for 1 birr investment in fixed asset in the
year of 2017—2021 respectively

The trend efficiency of the bank the last years can be shown in the following graph for more
understanding

As shown in the above figure the fixed asset turnover ratio increase continuously from 2017/18-
2020/21, this reflect the development of operating and high purchase of fixed asset on the
previous years. The bank average is 5.5 mean the bank is not good in using its fixed asset to
generate income.

4.5.3 Total asset turnover of commercial bank of Ethiopia

This describes how effectively the firm is using its assets to generate income. In this case to look
at the banks total asset investment the total asset turnover computed as follows

Total asset turnover= total operating income

Total asset

Total asset= current asset+ fixed asset

27
Table 4.5.3 analysis of total asset turnover during 2017/18-2020/21

Year Total operating income Total asset Total asset turnover

2017 283,993,520 3,746,908,113 0.076
2018 382,103,369 4,876,253,912 0.078
2019 715,468,338 2,279,733,883 0.089
2020 927,549,687 11,172,663,244 0.083
2021 686,706,099 9,250,106,039 0.074
Sources, down competition based on annual report of commercial bank of Ethiopia

Interpretation: commercial bank of Ethiopia generate on income of 0.076,0.078,0.089,0.083 and

0.074 for the year from2017-2021 respectively.

As shown in the above table, the total asset turnover ratio of the bank have been increasing from
2017/18-2020/21 and decrease from 2017 - 2021

4.6 leverage ratio of commercial bank of Ethiopia

The long term credit like debenture holders, financial institutions are more concerned with the
firms’ long term financial strength. To judge the long term financial position of the firm,
financial leverage is capital structure ratio as calculated. These ratios indicated that mix of funds
provided by owners and lenders.

4.6.1 Debt ratio of commercial bank of Ethiopia

Debt total asset ratio (debt ratio) indicates the abilities of the bank to meet its liability with its
total asset. It measure the proportion of total asset acquired with borrowed money debt ratio. It
calculated as follows;

Debt ratio= total debt

Total asset

Table 4.6.1 Analysis of debt ratio during 2017/18 -2020/21

Year Total debit Total asset Debit ratio

2017 3,341,309,875 3,346,908,113 0.89
2018 4,300,530,344 4,876,253,912 0.88

28
 2019 6,371,267,351 2,279,733,883 0,88
2020 9,752,944,310 11,172,633,244 0.87
2021 8,063,640,435 9,250,106,039 0.87
Source owns computation based on annual report of commercial bank as introduce in the above
table. commercial bank debit ratio is 0.89, 0.88, 0.88, 0.87 and 0.87 in year 2017-2021 respective.
This implies that the creditors have financed more than half of the firm’s total financing. The
bank averages 0.88 shows the highest it figure relatively. It means it is not good in financing or
much of the financing is debit.

4.6.2 Debit equity ratio of commercial bank of Ethiopia

Debit equity is the ratio of total debit in the bank both long term and short term. Where equity is
the sum of common stock, preferred stock or capital reserve (net worth) it asses the relative
capital contribution of creditors and stock holders debit equity ratio is calculated as follows.

Debit equity ratio =total debit

Total equity

4.6.2 Analysis of debit equity ratio during 2017/18-2020/21

Year Total debit Total equity Debit equity ratio

2017 3,341,309,875 341,758,879 9.8
2018 4,300,530,344 482,531,183 8.9
2019 6,371, 267,351 761,304,777 8.4
2020 9,752,944,310 1,336,496,549 7.3
2021 11,198,980,873 998,658,974 11.2
Source; owns computation based on annual report commercial bank of Ethiopia

4.7 Profitability ratio of commercial bank of Ethiopia

Profit is the difference between revenue and expense over a period of time. Profit is the ultimate
measure of financial performance of a bank. These ratios are calculated to measure the operating
efficiency. It means these ratios measure management’s ability to control expense and income.

29
4.7.1 Return on equity of commercial bank of Ethiopia
This ratio measures the profit generated per birr investment made by the owner of the bank and
every interested in the rate of return on their investment. Higher return on equity increase the
price of shares in the capital market and stockholders also expected higher dividend distribution.
A return on equity of shareholders is calculated to show the profitability of owner’s investment.
The shareholders equity or net worth will include paid up share capital, share premium and
reserve and surplus less accumulated loss.The return on shareholders’ equity in net profit after a
tax dividend by shareholders equity.

ROE= net income/equity

Table 4.7.1 Analysis of debt equity ratio during 2017/18 -2020/21

Year Net income Equity ROE

2017 95,166,061 341,758,879 0.28
2018 116,641,110 8,331507 1.40
2019 213,846,045 761,304,777 0.28
2020 360,629,582 1,336,496,549 0.27
2021 847,557,864 959,348,943 0.88
Source; owns computation based on annual report of commercial bank of Ethiopia Return on
equity index of commercial bank was at its minimum at 2021 which was 0.88 but in the year
2018 is rich maximum that is 1.40, this ratio indicate how well the firm has used the source of
owners. Generally the bank is not good in using its equity.

4.7.2 Basic earning power ratio (BEPR) of awash bank Basic earning power ratio indicate to
ability of DB to generate income before tax and leverage. It is calculated by dividing earnings
before interest and tax to total asset of the bank.

BEPR= EBI
Total asset

Year Net income Net asset BEPR

2017 9,188,597, 3,746,908,113 0.0024
2018 264,008,176 4,876,253,922 0.054

30
 2019 283,128,015 7,279,733,883 0.039
2020 715,542,692 11,172,633,244 0.064
2021 505,759,349 9,250,106,039 0.055

Source own computation based on annual report of commercial bank of Ethiopia

The banks BEPR were 0.24% and 5.5% for two years 2017-2021 respectively. This are total
asset power in generalizing annual report in the percentage. In the bank average is 4.2% this
means the bank is not good position in its earning power

4.7.3 Dividend per share (DPS) commercial bank of Ethiopia

The net profits after tax belong to the shareholders. But it come to which say really relieve is the
amount of earning distribution as cash dividend .Therefore large number of percentage and
potential investors may be interested in to BPS. Distribution to ordinary shareholders dividend
by the number of ordinary shares of thought standing.

DPS= dividend

Number of ordinary share out standing

Table 4.7.3 analysis of BPS during 2017-2021

Year Earning laid to share holders Number of ordinary out standing DPS
2017 32,935,518 300,000 109.785
2018 68,176,184 500,000 136.352
2019 90,236,082 1,500,000 60.157
2020 1,679,065,729 1,635,700 102.5120
2021 145,127,956 1,707,000 85.019
Source; owns computation based annual report of commercial bank of Ethiopia

Bank distribution per share as dividend highly decrease from 2017 and 2020 the increment of
BPS is due the number of share standing increasing by the increasing rate than the dividend paid
to the shareholders increased by increasing rate which make the dividend per share.

31
4.7.4 Dividend payment ratio of commercial bank of Ethiopia
The dividend payment ratio is dividend per share divided by the earning per share.

Dividend payment= dividend per share

Earnings per share

Table 4.7.4 analysis of dividend payment ratio during 2017-2021

Year Earning laid to share holders Number of ordinary share standing DPS
2017 109.785 529 0.21
2018 136.352 526 0.26
2019 60.1557 558 0.11
2020 102.1444 560 0.18
2021 85. 019 493 0.17

As Shawn in the above table the dividend payout ratio increase and decrease until 2017 -2018
and 2019 2020 2021 respectively. This is due to the fluctuation of income and on increasing the
number of shareholders. So that it was slightly decrease at last period for the last five years all
the bank total income, expenses and deposit were increase. This is re selection of the banks
strong performance in its accurate. Furthermore the financial statement are assessed and
analyzed through ratio analysis. The result of the ratios the bank improved performance over the
last five years.

32
 CHAPTER FIVE

SUMMERY, CONCLUSION AND RECOMMENDATION

The study intended to examine main financial ratio and analysis system in commercial bank of
Ethiopia Arab Minch branch major findings of this study has been summarized , conclusions, are
drawn based on the findings and recommendations are forwarded for the concerned parties.

5.1 Summaries
Financial performance is the process of identifying the financial strength and weakness of the
bank. In Ethiopia business organization need to know there financial position,liquidity,make
share and profit percentage in order to have proper growth. The main objective of this study is
assessing the financial performance of the commercial bank in Arba Minch branch through ratio
analysis. Ratio can be categorized into liquidity, activity, leverage and profitability ratio
generally the data gathered from the bank has contributed forward most of the study feedings.
Hence the following conclusion has been made from the study and recommended accordingly

5.2 Conclusion
Evaluation the performance of the bank uses to different users for managers, it help in
identifying their companies strength and weakness when compare its previous years financial
performance of the owners, it is a means of evaluating how their business performing to
maximize to wealth of the firm .the relevant financial ratios are calculated to evaluate the
financial performance of commercial bank of Ethiopia Arbaminch branch. From the analysis
made on the previous chapter the researcher include that;

 In all of the study the year of the bank current ratio is greater than 1.1 birr. this indicates
that the bank hold more cash than its peers to meet immediate cash withdrawals needs
of depositions. It was improve over the year under review without these improvement
attainments of the requirement.
 Concerning the activity ratio, the current asset comprising the largest section of total
asset. The lower pirating efficiency show to generate income with a given movement of
investment on current asset. The current asset turnover was 0.077, 0.080, 0.100, 0.084
and 0.06 birr for the last consecutive five years. These result in their level of return of
capital employee that affects operation profitability and leverage ratio .
33
for significance and return on the shareholders investments that means lower return on equity in
the case of fixed asset turn over, the banks performance in using fixed asset decline from 2017-
2018. moreover, the total asset turnover revealed that inefficiency of management in proper
qualitative judgments in generating income given total asset, because to generates income for
birr of capital employee each year of during 2019-2020.

The bank have high leverage because, more than half of its capital is proved creditors and the
bank debt ratio is 0.89, 0.88 0.88 0.87 and 0.87 for the last consecutive five years.

 The bank has lower return on asset 7.6% 7.8% 9.8% 8.3% and 7.4% for the last
consecutive years. The low return result from the bank low basic earning power is the
ability of the bank's asset to generated income before tax and leverage and its high
interest cost results from its above average use of debt both of which cause its net
income respectively low. More cover the bank has also low return on equity that is 28%
14% 28% 27% and 26%for the years covered by this study. This low return is result
from low level of current asset turnover and it is high interest cost resulted from its
above user of debt. Based on analysis comparison with the bank bench mark the bank
show relatively good position.

5.3 Recommendation
 Accounting in real sense, it is the language of business which describe the problem of
the bank and also truck for the possible solution. In decision making of quantitative
decision based on quantitative information for the problems especially mixed and
descriptive information or decision, so good financial management is vital important to
the economic health of business firm. For the sack of this result in this study the
researchers have trend to detect and asset the main strength and weakness of
commercial bank by using ratio analysis
 Based on conclusion of the following possible solution of opinion have suggested
hooping that they would help to avail program and obstacle, which are detected in the
analysis part of this paper tries the financial operation and economic performance of the
bank
 The bank should policy make continue its improvement of current ratio in order to
compare with other bank. This guarantee depositor and creditor from suffering a need

34
fund. So management of the bank should maintain its liquidity position by using
alternative like sell of stock and bond also by improving its current asset turnover.

35
 Reference

 Kuchhal S. C ( 2005) Financial management chaitanya publishing house Allahabad

 Pandey I.M ( 2008) financial management, vikas publishing House put Ltd.

 Brigham EF.(1972) fundamental of financial management Dryden press, Chicago

 GitmanL.j(2005) principle of financial management

 Prasanny Chandra. financial management theory and practice Tata McGraw hill

 Philip,Daves (,2009) intermediate financial management

 Im Pandy, (2015) financial management principle

 Horn(,2002 )financial management principle and practice

 Internet (WWW.google.com

 Munir, S., Muhammad, R., Rao, Q., Muhammad, A., and Ali, R. (2008). Financial
Performance

 Assessment of Banks. A Case of Pakistani Public Sector Banks. International Journal of

Business and Social Science, 3, 14.

 Nimalathasan, B. (2008). A comparative Study of Financial Performance of Banking Sector

in
Bangladesh; An Application of CAMELS Rating System. Annual of University of
Bucharest. Economic and Administrative Series, 2, 141-152.
 Tabassum, N. (2010). Analyzing Financial Performance of Commercial Banks in India;

 Khalad, A. and Yusuf, M. (2013). Evaluating the Performance of Libyan Banks Using
Return on
Investment. American Journal of Economics and Business Administration, 5, 84-88

 Mabwe, Kumbirai and Robert, Webb (2010). Financial Ratio Analysis of Commercial Bank
in
South Africa. African Review of Economics and Finance, 2, 1.

 Asres Abite and Dejene Mamo (2012). Evaluation of Financial Performance of Banking
Enterprise; In the Case of Construction and Business Bank. Revista Tinerilor Economisti
(The Young Economists Journal), 1, 82-102.

1
 APPENDIX
ARBAMINCH UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCONUTING AND FINANCE

As known that understands research project information is need from concerned Case study
area or organization. This is a part of information that I request you to provide me regarding
my research project. Thus I assure that the information that provides from you is
confidential in such a way that everything has be accomplished in between me and you.
This is keep your secrecy concerning your personal profile, information you are requested
provide or answered and ensure your career future. This means that you may not need to
give your name on the paper/questionnaires provided. So while you fulfill the questionnaire
and interviews please read and answer to your knowledge and provide useful information
on your think under take study area/research.

Sincerely yours!

 The following questions are develop to achieve the research objectives.

Part: one background of the respondent

List of workers to provide information regarding the questions raised for awash banks is as
follows

1. Gender

Female

Male
2. Marital statutes
Single Separated

Married widowed

3. Age

Below 22 22-30

2
 31-45 46 and above

4 . work experience

Below 2 years 2…4 years

4…..6 years Above...6 years

Part: two General questions

The following are the questions you are requested only to fulfill the space provided
accordingly.

Thank you

1. Do you think the bank shows change in its profitability?

Yes
No

2. If your answer for questions number one above is yes, what are your explanations?

………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………

3. is the bank trying show change on its liquidity, leverage and market relationship through the
year?

Yes
No

4 . If your response is yes, please try to justify it how changed through the year?

………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………

5 . Does the bank faced a problem in its financial performance

Yes

No

3
6. if your answer is yes, list the problem that faced in its financial performance?

……………………………………………………………………………………………
……………………………………………………………………………………………
…………………………………………………………………………………………..

7. Does the bank show future prospect based on its past performance?

Yes

No

8. If your answer is yes, list future prospect of the bank based on its past performance?

………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………

9. If your answer is no, what are the reasons to show the future performance based on its past
performance?

………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………

10. Due you think is a relationship between liquidity, leverage and activity ratio in the
performance of the bank?

Yes
No

11. If your answer is yes what kind of relationships are existing between those ratio?

Positive
Negative

12 .If your answer is positive, write positive relationships of this

relations……………………………………………………………………………………………
………………………………………………………………………………………………………
…………………………………………………………………………………

4
13. If your answer is negative, write the negative relationship exists these
relations……………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………

Part three Interviews

Interview questions to financial ratio analysis on commercial bank of Ethiopia in case of

Arab Minch branch

1 . Does your bank have financial ratio policy

2. What type of financial ratio doe the bank proved?

3. What are the requirements financial ratio had to fulfill to get profit?

4. Is there any remaining amount of financial ratio, if the organization fails to gather

profit?