FINANCIAL ACCOUNTING FA 601

PROJECT PAPER

STUDENT NAME: MARK MISOMALI

STUDENT ID NO: 24ELI-11765

INTAKE AND VENUE: EVENING 24, LILONGWE

LECTURERs NAME: LUCKY YONA

DATE SUBMITTED: DECEMBER 01, 2011

PREFACE
Financial statements provide useful information about the companys financial position
and operations for a specified period. There is a wide range of interested users of
financial statements of a company. Different groups use financial statements for
different purposes, for example, lending institutions may want to know the
creditworthiness of a company they want to deal with, stock brokers may want to
determine if the stock is profitable, suppliers may want to know if they would be paid in
time for their goods and services. The numbers shown on a financial statement may
therefore be interpreted differently by different user groups. Ratio analysis is a
technique that involves dividing various financial statement numbers into one another
with the purpose to examine and determine trends and reasons for changes in financial
statements.

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Table of Contents
Chapter 1:

Introduction..1

Chapter 2:

Importance of using ratios.....3

Chapter 3:

Findings and analysis..4

Chapter 4:

Recommendations...9

Chapter 5:

Conclusion....9

Appendix..10

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CHAPTER 1: INTRODUCTION
Financial ratios are primary used to compare a companys financial figures over a
period of time. This method is called trend analysis. Through trend analysis one can
identify trends, good or bad and adjust the business practice accordingly. There are
other methods of financial analysis which involve comparison of different companies in
the industry. For the purpose of this project paper, I am going to stick to trend analysis,
comparing performance of NBS Bank Limited over a period of four years. This project
paper on financial ratio analysis is aimed at measuring the general performance of the
NBS Bank. The ratios would help to get an understanding of the NBS Banks
profitability, financial stability and efficiency with which it is utilizing its assets to
generate revenue. NBS Bank Limited is a company domiciled in Malawi involved in
corporate and retail banking and treasury management through 24 service centers
across the country. The bank is quoted on the Malawi stock exchange.
Purpose and methodology
This project paper is only an academic exercise commissioned as part of a financial
accounting module under the executive MBA program. The sources of the data used
are the published financial statements i .e. the income statements and the balance
sheets of NBS Bank Limited for the fiscal years 2007 to 2010. Copies of NBS Bank
Limited Balance sheet and Income Statements for the years 2007 t0 2010 are included
as Table 1 and Table 2, respectively, in the appendix at the end of this paper. Ratio
calculations are based on these financial statements and they are discussed under
Findings and Analysis in Chapter 3.

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Chapter 2: Importance of using ratios

Ratios are important tools in financial analysis. It is not enough to know that a company
made a profit of, for example, US$20Million without understanding what this means.
How would one know that the level of profit attained represents company growth,
operational efficiency, or sustainability? Ratios come into play by relating the numbers
to one another in order to determine whether the level of operation represents growth,
efficiency of operations, profitability or liquidity. The ratios help to identify and quantify
the companys strengths and weaknesses, evaluate its financial position, and
understand the risks.
Limitations of financial ratios
As with any other form of analysis, ratios are not definitive and their results should be
viewed with other factors. Historical costs may not be realistic in the present situation.
Use of different accounting principles, manipulation of the accounts by management,
and changes in the industry are some of the factors that can limit the usefulness of
financial ratios. When used in concert with various other business evaluation processes,
financial ratios are invaluable.
Types of ratios
There are many types of ratios but for the purpose of this project, we are going to
discuss the following ratios:1. Activity ratios
2. Debt to Equity ratio
3. Debt to Asset ratio
4. Profitability
5. Quick ratios
6. Non-Current Assets to Total Assets
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7. Equity to Assets ratio

8. Long-Term Debt to Assets
9. Tangibility

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Chapter 3: Findings and analysis

1. Activity Ratios
These are ratios which measure how effectively a firm is using its assets. They are used to give an indication of the
efficiency of asset usage. These ratios compare sales against assets. As a result of the nature of banking transactions, I just
used the operating income as sales/revenue.We are going to consider two examples of activity ratios as follows:-.
2010

2009

2008

4,106,355

3,372,077

2,236,880

38,832,770

29,318,141

20,650,663

14,211,794

15%

14%

16%

16%

4,106,355

3,372,077

2,236,880

3,160,629

2,734,513

1,557,970

1,870,198

1.9

1.5

a. Total Assets Turnover = Total Sales/Revenue 6,006,471

Total Assets
=

b. Fixed Assets Turnover = Total Sales/Revenue 6,006,471

Fixed Assets
=

2.2

2007

1.2 times

The Total asset Turnover remained constant at 16% in 2007 and 2008. Dropped in 2009 to 14% and rose to 15% in 2010. At an
average turnover of 15%, NBS uses 7% of assets to make $1 of revenue. Possible explanation for this low utilization of assets
could be high volume of loans and advances to customers. The fixed Asset Turnover ratios are favourable ranging from 1.2 to
2.2 times. This means a $1 fixed asset is able to generate between $1.2 to $2.2 revenues. These moderate fixed asset turnover
ratios make sense because banking is not a capital intensive business operation.

2. Debt to Equity

This ratio compares the funds provided by creditors to the funds provided by shareholders.
Total Liabilities
Shareholders equity

35,272,230

26,798,041

18,746,382

12,970,734

3,560,540

2,520,100

1,904,281

1,241,060

10:1

10:1

10:1

10:1

The higher ratios indicate that more funds for the bank are provided by creditors than shareholders. This means for every
dollar of equity, the firm has borrowed about 10 dollars. A possible explanation is a steady increase in customers Savings
and deposits accounts from 2007 to 2010. This is a favourable condition because the banks main source of revenue is
interest from the customers accounts.

3. Debt to Asset
This ratio measures the level of debt in relation to investment in assets. This ratio measures the level of debt in relation to
investment in assets
=

Total Liabilities

35,272,230

26,798,041

18,746,382

12,970,734

Total Assets

38,832,770

29,318,141

20,650,663

14,211,794

91%

91%

91%

91%

The higher debt ratios indicate that the bank does not have sufficient assets to cover its debt load. This means that for every
dollar asset there is a debt of 91cents. This does not leave enough assets as collateral for further borrowing.
4. Profitability
Profitability ratios measure the ability of a company to turn revenue into profits and to earn profits on assets committed.

Return on Assets =

Net Income

2,295,049

1,350,918

1,216,391

460,555

Avg. Total Assets

25,753,342

25,753,342

25,753,342

25,753,342

9%

5%

5%

2%

There has been a steady increase in profitability since 2006 which could be attributed mainly to increased loans and
advances to customers which have generated higher interest.
5. Quick Ratio =

(Current Assets Inventories) 35,672,141

Current Liabilities

34,550,759
1:1

26,583,628

19,092,693

12,341,596

25,654,436

17,695,614

11,884,875

1:1

1:1

1:1

Quick ratio measures the ability of the company to meet its obligations in the near future. From the above figures, NBS Bank
has consistently maintained a healthy liquidity over the past four years. Every dollar short-term debt is covered by liquid
assets.
6. Non-Current assets to Total Assets
= Fixed Assets

3,160,629

2,734,513

1,557,970

1,870,198

Total Assets

38,832,770

29,318,141

20,650,663

14,211,794

8%

9%

8%

13%

This ratio shows what proportion of the companys assets are profit generating fixed assets. NBS ratios for the past four
years are very low indicating that it most of its funds are generated by current assets.
7. Equity to Asset Ratio

This ratio is used to ascertain a companys financial stability. It shows how much of the assets are owned by the company
and how much are financed through debt.
=

Equity
Total Assets

3,560,540

2,520,100

1,904,281

1,241,060

38,832,770

29,318,141

20,650,663

14,211,794

10%

9%

9%

9%

NBS Bank has an average Equity to Asset ratio of 10% for the past four years. This means that most of the assets are
financed through debts.

8. Long Term Debt to Assets

This ratio is measures the total Long-term debt outstanding as a percentage of assets. It is used to assess the extent to
which the company is using long-term debts
= Long-Term Liabilities
Total Assets

721,471
38,832,770
2%

1,140,605
29,318,141
4%

1,050,768
20,650,663
5%

1,085,859
14,211,794
8%

The banks long term debt has consistently been going down from 8% in 2007 to 2% in 2010.Thes bank has a low risk in
terms of long term debt.
Tangibility
This ratio is used to determine how much loss a firm can take before shareholder equity is wiped out.
(Total Assets Intangible Assets) 38,761,378

29,264,456

20,648,912

14,206,220

Total Assets

38,832,770

29,318,141

100%

100%

20,650,663

14,211,794

100%

100%

The bank has maintained a tangibility ratio of 100% from 2007 to 2010. This means that all NBS bank assets are tangible
assets. In times of loss there would be adequate coverage for shareholders and creditors.

Recommendations
From the above ratio analysis I would recommend that NBS bank improves its profitability and debt load. It should increase its long
term investment for the purpose of generating more revenue which would in turn raise the shareholder equity funds.
Conclusion
Financial ratios provide useful information for economic decisions. Investors want to know if there will be good returns from their
investment, lenders want to know the creditworthiness of the borrower. Generally NBS bank performance and financial position are
sound. The bank has great potential for growth and can attract investors because of its strong liquidity position.

Appendix
Table 1: Balance sheet
NBS Bank Limited
Balance Sheets as at 31st December for the past four years (in thousands of Malawi Kwacha)
2010

2009

2008

2007

Assets
Current Assets
Cash and Cash equivalents

9,134,059

6,137,262

4,188,461

635,542

Money market investments

1,199,078

1,793,109

906,769

1,826,129

24,143,692

17,945,806

12,871,498

7,919,042

930,228

591,623

1,019,626

264,150

Loans and advances to customers

Other assets
Amounts due from subsidiary companies
Deferred tax assets

86,694
178,390

115,828

106,339

Balances due from other banks

1,637,146

Inventories

59,587

35,672,141

26,583,628

19,092,693

12,341,596

3,027,972

2,612,298

1,537,554

1,853,349

Fixed Assets
Property and equipment

Intangible assets

71,392

53,685

1,751

5,574

Equity investments

61,265

68,530

18,665

11,275

3,160,629

2,734,513

1,557,970

1,870,198

38,832,770

29,318,141

20,650,663

14,211,794

Total assets
Liabilities and Equity
Current Liabilities
Current and savings accounts
Foreign currency denominated accounts
Amounts due to subsidiary company

19,123,635

18,265,965

10,724,530

7,533,380

2,309,924

899,715

1,093,407

933,911

33,545

Term deposit accounts

8,262,881

Short term loan

3,028,773

Other liabilities

1,055,868

636,080

551,354

819,724

91,449

173,551

136,733

119,463

Provisions

471,087

374,257

345,705

Deferred tax liabilities

173,597

156,042

156,882

24,135

34,550,759

25,654,436

17,695,614

11,884,875

721,471

1,140,605

1,050,768

1,085,859

Income tax payable

5,151,826

4,687,003

2,454,262
-

Long-Term Liabilities
Long term loans

Total liabilities

35,272,230

26,798,041

18,746,382

12,970,734

Equity
Issued capital

260,372

246,667

246,667

246,667

Share premium

602,756

314,948

314,948

314,948

Revaluation reserve

297,648

278,443

224,708

228,310

Loan loss reserve

124,202

124,202

124,202

Fair value reserve

14,264

16,045

17,359

31,465

Retained earnings

2,261,298

1,539,795

976,397

419,670

Total equity

3,560,540

2,520,100

1,904,281

1,241,060

38,832,770

29,318,141

20,650,663

14,211,794

Total liabilities and equity

Table 2 Income Statement

NBS Bank Limited

Income Statements for the past four years ended 31 st December (in thousands of Malawi Kwacha)

2010

2009

2008

2007

INCOME
Interest on loans and advances

3,894,900

2,995,989

1,855,692

1,327,902

33,924

38,864

83,915

59,915

Income from lease financing

426,649

415,442

306,346

170,771

Income from money market investments

247,971

153,653

178,776

323,510

Total interest income

4,603,444

3,603,948

2,424,729

1,882,098

Interest expense

(1,393,719)

(1,072,510)

Interest on placements with other Banks

(565,241)

(664,017)

Net interest income

3,209,725)

2,531,438

1,859,488

1,218,081

Fees and commission income

1,471,616

1,137,536

979,139

611,355

Profit on foreign exchange transactions

1,302,402

426,616

522,337

399,188

11,093

8,256
2,236,880

Other operating income

Operating Income

22,728)

10,765)

6,006,471

4,106,355

3,372,077

1,688,939

1,367,534

960,247

)
EXPENDITURE
Personnel expenses
Recurrent expenditure on premises and

845,827

equipment

282,769

253,629

299,750

180,835

167,594

164,990

Other operating costs

1,378,541

924,299

774,216

550,267

Operating expenditure

3,711,422

2,755,437

2,155,686

1,776,325

Profit before impairment losses

2,295,049

1,350,918

1,216,391

460,555

Depreciation and amortisation

Loan impairment losses

Profit before income tax expense
Income tax expense
Profit for the year

344,192

(269,682)
2,025,367
(670,838)
1,354,529)

(143,776)

(92,317)

1,207,142

1,124,074

215,241

(47,791)
412,764

(397,077)

(345,347)

(148,554)

810,065

778,727

264,210