Executive Summary

This financial analysis of The Goldman Sachs Group Inc is a term project for the course Working Capital Management. Its a competitive in the financial industrys scene in United States of America. We have analyzed the companys performance over a 3 years period and compared it to another bank Prime Bank Ltd. Afterwards, we have figured the intrinsic value of the stock of the bank and through valuation method and technical analysis provided recommendation for the investors. We tried to gather informations as much as we can. We checked annual reports of both financial institutions. We tried our level best to compare the situations of both banks. We performed trend analysis and graphically presented each of the ratios we calculated. We compared three years timeline. Based on our analysis, we came up with a conclusion whether Prime Bank is at a risk of getting bankrupt in future.

Literature Review
Time Series Analysis: Time Series analysis evaluates the performance of the company overtime. In this method different ratios are used to make comparison of current to past performance. Cross Sectional Analysis: Cross sectional analysis involves the comparison of different companys financial ratios at the same point in time. How well a company has performed in the relation to other company can be measured by comparing the ratio values to those companies. Ratios: Profitability ratios: 1. ROE: Return on equity is a measure of how efficiently the company is using its equity to generate profit. The formula isNet Income/Common Equity 2. ROA: It is a good indicator of how efficiently the company is using its asset to generate profit. The formula isNet Income/Total Assets 3. Net profit margin: It is an indicator of effectiveness of expense management (cost control) and service pricing policies. The formula is-

Net Income/Revenues 4. Net Interest Margin: Net interest margin measures how large a spread between interest income and interest costs management has been able to achieve by close control over total assets. The formula is(Int. Income-Int. Exp)/Total Assets 5. Net Non-interest margin: Net non-interest margin measures how large a spread between non-interest income and non-interest costs management has been able to achieve by close control over total assets. The formula is(Non Int. Income-Non Int. Exp)/Total Assets 6. Net Operating margin: Its shows how much does the firm generate net worth against investing in assets. The formula is(Total operating revenue-Total Operating Exp)/Total Assets 7. Asset Utilization: Also known as asset management efficiency. It is a good indicator of portfolio management policies, especially the mix and yields on the banks assets. The formula isTotal Op. Revenues/Total Assets 8. Tax Mgt. Efficiency: It shows how efficiently the firm does manage its taxes with net operating income. The formula isNet Income/ Net Operating Income before tax 9. Expense Control Efficiency: It shows how efficiently the firm does manage its expense with its revenues. The formula isNet operating income before taxes/total operating revenues 10. EPS: EPS measures how much the firm earns against every common share. The formula is- Net Income after tax/ Common Equity Shares outstanding

11. Equity Multiplier: It is a good indicator of leverage or financing policies, the sources chosen to fund the bank (debt or equity). The formula isTotal Assets/Total Equity Capital Efficiency ratios: 1. Operating Efficiency ratio: It shows how much operating expenses a company is incurring and by incurring those it is generating revenues. The formula isTotal Operating Exp/ Total Operating Revenues 2. Employee productivity ratio: It actually measures the contribution of each employee in firms earnings. The formula isNet Operating Income/ Number of full time employees 3. ROA: It is a good indicator of how efficiently the company is using its asset to generate profit. The formula is- Net Income/Total Assets 4. Asset utilization ratio: Also known as asset management efficiency. It is a good indicator of portfolio management policies, especially the mix and yields on the banks assets. The formula isTotal revenue/Total asset Market position ratios: 1. Dividend Payout Ratio: It shows what portion of net income given to the shareholders as dividend. The formula is- Dividend Paid/ Net Income 2. Dividend yield ratio: The formula for dividend yield ratio is- (DPS/Current market price of the share) *100

3. P/E ratio: P/E ratio indicates- to get additional benefit, the investors are paying how much. If P/E ratio goes up the growth potential raises up and so does investors confidence. The formula is- Market price of share/EPS 4. Market book ratio: This ratio indicates whether the share is overpriced or underpriced. If it is overpriced, the market is ready to pay more for the stock because the additional value created in the market for good performance. If it is underpriced, the market is not ready to pay more for the stock. The formula ismarket price of the stock/book value per stock LIQUIDITY RATIOS: 1. Cash position indicator: This ratio indicates cash. Higher the ratio, better the liquidity position. The formula for the ratio is- cash and deposits due from depository institution/total asset 2. Liquid securities indicator: Marketable securities are more liquid. Government securities are one of the good examples of marketable securities. The formula for the ratio is- Gov. securities/total asset 3. Net federal fund position: The formula for Net Fed. Fund position is the difference between Fed. Funds sold and Fed. Funds purchased divided by Total Asset. 4. (Fed. Funds sold Fed. Funds purchased)/Total Asset 5. Capacity ratio: This ratio is a negative liquidity ratio. The formula for the ratio isNet loans and losses/ Total Asset 6. Pledged securities ratio: Pledged securities are those securities that banks used as collateral. This ratio is also a negative liquidity ratio. The formula for the ratio is- Pledged securities/Total Securities holdings

7. Hot money ratio: Hot money asset are money market (short term and very liquid) instruments. The formula for the ratio is- Money market asset/ Money market liabilities 8. Deposit brokerage index: Liquidity requirement is very high as the probability of withdrawn of brokered deposits is high. The formula for this ratio is- Brokered deposits/Total Deposits 9. Core deposit ratio: Core deposits are those accounts where small amount of money is deposited. The formula to calculate core deposit ratio isdeposits/Total Assets 10. Deposit composition ratio: The formula for deposit composition ratio isDemand Deposits/Time Deposits 11. Loan Commitment Ratio: This is another negative liquidity ratio. Unused loan commitments are off balance sheet items. The formula for this ratio is- Unused Loan commitment/Total Assets LEVERAGE RATIO: 1. Debt ratio: It is a simple measure of total liability to total asset ratio. The formula is- Total liability/Total assets 2. Debt to equity ratio: The formula for debt to equity ratio is- Long-term debt/Equity capital Core

Company overview
Prime Bank In the backdrop of economic liberalization and financial sector reforms, a group of highly successful local entrepreneurs conceived an idea of floating a commercial bank with different outlook. For them, it was competence, excellence and consistent delivery of reliable service with superior value products. Accordingly, Prime Bank Ltd. was created and commencement of business started on 17th April 1995. The sponsors are reputed personalities in the field of trade and commerce and their stake ranges from shipping to textile and finance to energy etc. As a fully licensed commercial bank, Prime Bank Ltd. is being managed by a highly professional and dedicated team with long experience in banking. They constantly focus on understanding and anticipating customer needs. As the banking scenario undergoes changes so is the bank and it repositions itself in the changed market condition.

Prime Bank Ltd. offers all kinds of Commercial Corporate and Personal Banking services covering all segments of society within the framework of Banking Company Act and rules and regulations laid down by our central bank. Diversification of products and services include Corporate Banking, Retail Banking and Consumer Banking right from industry to agriculture, and real state to software.

Prime Bank Ltd., since its beginning has attached more importance in technology integration. In order to retain competitive edge, investment in technology is always a top agenda and under constant focus. Keeping the network within a reasonable limit, our strategy is to serve the customers through capacity building across multi delivery channels. Our past performance gives an indication of our strength. We are better placed and poised to take our customers through fast changing times and enable them compete more effectively in the market they operate.

Goldman Sachs The Goldman Sachs Group, Inc. is an American investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients. Goldman Sachs was founded in 1869 and is headquartered at 200 West Street in the Lower Manhattan area of New York City, with additional offices in major international financial centers. The firm provides mergers and acquisitions advice, underwriting services, asset management, and prime brokerage to its clients, which include corporations, governments and individuals. The firm also engages in proprietary trading and private equity deals, and is a primary dealer in the United States Treasury security market. As of 2009, Goldman Sachs employed 31,701 people worldwide. In 2006, the firm reported earnings of US$9.34 billion and record earnings per share of $19.69. It was reported that the average total compensation per employee in 2006 was US$622,000. However, this number represents the arithmetic mean of total

compensation and is highly skewed upwards as several hundred of the top recipients command the majority of the Bonus Pools, leaving the median that most employees receive well below this number. In Business Week's recent release of the Best Places to Launch a Career 2008, Goldman Sachs was ranked #4 out of 119 total companies on the list. Goldman Sachs is divided into three businesses units, Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services. Despite of world financial crisis in 2008 Goldman Sachs was able to gain profit during that time. This can be referred as a positive sign for the companies risk management. Goldman Sachs successfully overcomes the risk.

Research Methodology
For different aspects of analysis, different tools have been used in the paper. They are Fundamental analysis for evaluating companys performance has been used and the analysis horizon was from the year 2007 to 2009. The analysis mainly involved ratios, which have been analyzed through time-series analysis and also cross-sectional analysis with Dutch-Bangla Bank Limited. The ratios were from the following 5 categories: Profitability Ratio Efficiency Ratio Liquidity Ratio Debt Ratio Market Ratio

For intrinsic valuation of the companys share, Dividend Growth Model has been used. The average historic growth in Dividend per Share has been taken as the constant growth in future dividends. The formula used to find price of the stock was P0 = D1/(k g), where k = WACC, g = growth rate, P0 = Price and D1 = Expected Dividend in the next year. For the final recommendation on whether to invest in the companys stock or not, technical analysis using the Moving Average of Convergence and Divergence has been used.

Limitations
While doing the report our group had to face some limitation. The main factors that hampered the complete flawlessness of the report are Unavailability of Information: The main limitations of the report caused due to the unavailability of the information. As our report is based on the financial situation 3 year, we had to collect the 3-years annual report for both the companies from different places and web-sites. Besides, after collecting the financial reports we did not found many information as the companies do not publish all internal information. Therefore while analyzing because of the shortage of data some prediction or analysis may not be accurate.

Limitations of Theories In Some cases, the theories of ratios could not give a proper solution. These limitations of theories are

A Single ratio is never sufficient from which to judge the overall performance of the firm. If dates for the calculations of ratios are not the same, they might end up with seasonality error and show false result. The reliability of the financial statements might be questionable as per if not used an audited copy. The differing data must be compared in the same way; else the comparison will not show the right results as they should. Results can be distorted by inflation.

Financial Analysis
Financial performance of Goldman Sachs: The one review of stock performance of Goldman Sachs is given below

In the year 2008 the price started to fall and was ups and downs but at September 2008 the price of the stock went lowest realizing about $55 then the company started to grow again in 2009 now although the situation has improved Goldman Sachs still suffers from stock price volatility. Economic situation is not stable over there. But we think it is recovering faster.

Ratio Analysis Ratio analysis is the most effective way to determine any companys financial position. Each numbers in the ratio has some inherent meaning. For determining and comparing the financial condition of these two banks we used some ratio. We tried our best to determine from our knowledge. The ratios we used are: Liquidity Ratio Debt Ratio Profitability Market

We used these four types of ratio in order to determine the companys position. We didnt use turnover ratios because as a bank doesnt hold inventories or sales. The calculated ratios for the two banks Prime Bank Limited & Goldman Sachs are given in the following pages. Liquidity Ratio: Current Ratio: The Current Ratio is one of the most commonly cited financial ratios. It measures the firms ability to meet its short term obligations. Generally, the higher the Current Ratio, the more liquid the firm is considered to be.

In the year 2007, Prime Bank had current assets 1.14 times higher than current liabilities. In the year 2008, Prime Bank Ltd had current assets 1.13 times higher than current liabilities.

Again, from the year 2007 to 2008 the ratio had decreased i.e. the performance of Prime Bank Ltd had declined. From 2007 to 2008 the ratio had gone down because the relative increase in current liabilities was higher than relative increase in current assets.

Prime Bank Limited Ratio Name/Year 2007 2008 2009 2010

Current Ratio

1.14

1.13

1.15

1.13

Quick Ratio

1.14

1.13

1.15

1.13

Goldman Sachs Items 2007 Current Ratio (CA/CL) Quick Ratio [(CA-Inventory)/CL] 0.275622 0.275622 Years 2008 0.521152 0.521152 2009 0.490405 0.490405 2010 1.4 0.45

Current Ratio (Prime Bank)

1.155 1.15 1.145 1.14 1.135 1.13 1.125 1.12 2007 2008 2009 2010 Series 1

Current Ratio (GS)

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2007 2008 2009 2010 Current Ratio (GS)

Interpretations:

In the year 2007, Prime Bank LTD had current assets 1.14 times higher than current liabilities while Goldman Sachs had 0.27.

In the year 2008, Prime Bank Ltd had current assets 1.13 times higher than current liabilities and Goldman Sachs had around 0.53. From the year 2007 to 2008 the ratio had decreased i.e. the performance of Prime Bank Ltd had declined but Goldmans ratio increased.

From 2008 to 2009 Prime Bank Ltds ratio had gone but again GOLDMAN SACHS ratio also went down because of relative increase in liabilities.

Quick Ratio or Acid Test Ratio The Quick Ratio or Acid Test Ratio is similar to the current ratio except that it excludes inventory, which is generally the least liquid current asset. The quick ratio provides a better measure of overall liquidity only when a firms inventory cannot be easily converted into cash. If inventory is liquid, the current ratio is an overall measure of overall liquidity. Quick Ratio
1.4 1.2 1 0.8 Prime Bank 0.6 0.4 0.2 0 2007 2008 2009 2010 Goldman Sachs

Interpretations: In the year 2007, PRIME BANK LTD had current assets excluding inventory 1.14 times higher than current liabilities. In the year 2008, PRIME BANK LTD had current assets excluding inventory 1.13 times higher than current liabilities well GS was struggling at 0.27 From the year 2007 to 2008 the ratio had decreased i.e. the performance of PRIME BANK LTD had declined but GS performance increased From 2008 to 2009 the ratio had gone down because the relative increase in current liabilities was higher than relative increase in current assets excluding inventory. To illustrate the gaps between these two charts we can say that the quick ratio of Prim Bank is higher because Goldman Sachs use huge amount of current liabilities that causing to reduce its quick ratio much less than Prime Bank.

Leverage Ratio Goldman Sachs Items 2009 Years 2007

2007 Debt Ratio = Total Debt / Total Asset (x or %) 1.503582

2008 1.501547 0.30797

2009 1.53636 0.365391

2010 0.92 0.61

Long Term Debt Ratio = Long Term Debt / Total 0.230758 Asset (x or %) Debt Equity Ratio = Total Liability / Total 24.99371 Equity (x or %)

12.74182

11.00529

10.7501

TIE Ratio = EBIT / Interest Charges (x or %) Prime Bank Limited Items

2.708308

0.359385

3.050615

7.116

Years 2007 2008 2009 0.9056 0.68 2010 0.90 0.69

Debt Ratio = Total Debt / Total Asset (x or %)

0.9338 0.9393 0.72

Long Term Debt Ratio = Long Term Debt / 0.78 Total Asset (x or %) Debt Equity Ratio = Total Liability / Total 14.11 Equity (x or %) TIE Ratio = EBIT / Interest Charges (x or %) 1.14

15.47

9.59

8.72

1.01

1.13

1.74

Debt Ratio
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2007 2008 2009 2010 Goldman Sachs Prime Bank Ltd

If we look at Goldman Sachs the companys debt-asset increased this is a bad sign because the company have much liability. It happened because of financial crisis they faced. The company will do better in future we hope that. On the other hand Prime Bank also has a Debt Ratio just near 1 indicating it has just enough assets to cover its total debts. Profitability Ratio Prime Bank Ltd. Ratio Name Basic Earning power Return On Assets Return On Equity 2007 0.041 1.76% 26.55% Years 2008 0035 1.13% 18.62% 2009 0.040 2.26% 23.93% 2010 0.042 0.024 0.209

Goldman Sachs Items 2007 Basic Earning Power (BEP) = EBIT / TA 0.024744 (x or %) Return on Asset = Net Income / Total 0.016303 Asset (x or %) Return On Equity = Net Income / Total 0.271005 Equity (x or %) 0.036073 0.189284 0.108 0.004251 0.026424 0.043 Years 2008 0.004277 2009 0.039146 2010 0.043

Return on Equity
0.3 0.25 0.2 0.15 0.1 0.05 0 2007 2008 2009 2010 Prime Bank Goldman Sachs

During the analysis horizon, Prime Bank has always enjoyed higher return on equity except in 2008 the ROE went down to below 20%. The reason was a decrease in the banks net profit even after having a good growth in their Interest Income to 9 billion from 7 billion. This indicates the overall increase in the banks expenses. The return on equity of Goldman Sachs had been fluctuated throughout the years. The reason behind this is unstable net profit due to failure to recover the loans. Market Ratios: Goldman Sachs: 2009 2010 Items/Year 2007 2008 2009 2010 2008 2007

Earning Per Share = Net Income / Shares Outstanding (Tk/share) 13.18

10.76

29.66496

25.025974

Book Value per Share (BVPS) = Total Equity 152.42 137.3087 / SOS (TK/share) P/E Prime Bank Limited: Ratio Name/Year Earnings Share (EPS) Per Tk.61.57/share Tk.43.32/share 2007 2008 2009 12.21 15.3

139.3268

109.4629

6.88

7.87566

2010

Tk.78.33/share

83.47

P/E Ratio

15.01

12.47

8.34

14.69

Book Value Per 231.78 share

235.48

330.38

287.86

P/E Ratio: The P/E ratio is commonly used to assess the owners appraisal of share value. The P/E ratio measures the amount that investors are willing to pay for each dollar of a firms earning. The higher the ratio the better it is. P/E ratio indicates- to get additional benefit, the investors are paying how much. If P/E ratio goes up the growth potential raises up and so does investors confidence.

Goldman Sachs(P/E)
18 16 14 12 10 8 6 4 2 0 2007 2008 2009 2010 Goldman Sachs(P/E)

Prime Bank(P/E)
16 14 12 10 8 6 4 2 0 2007 2008 2009 2010

Prime Bank(P/E)

Interpretations: In 2007, 2008, 2009 and 2010 the shareholders of Prime Bank were willing to pay Tk.15.01, Tk.12.47, Tk. 8.34, and Tk. 14.69 respectively per each dollar of reported earnings.

In 2007, 2008, 2009 and 2010 the shareholders of Goldman Sachs were willing to pay Tk.7.87566, Tk.6.88, Tk. 15.3 and Tk. 12.21 respectively per each dollar of reported earnings.

The reason for lower P/E is higher EPS. In 2008 Goldman Sachs has lower P/E than the other years. The reason behind this is the company exhibits higher EPS during this year.

Prime Bank has a good P/E than that of Goldman Sachs except for year 2009.

Book value per Share: BVPS estimates the total value of per share currently holding and declared by the company.

Book value per share(GS)

180 160 140 120 100 80 60 40 20 0 2007 2008 2009 2010 Book value per share(GS)

Book value per share(Prime bank)

350 300 250 200 150 100 50 0 2007 2008 2009 2010 Prime bank(BVPS)

Interpretations: Book value per share of the Goldman Sachs increased from the year 2007 to 2008 and this is because of trying to hold shares more tightly, but a slight dip in 2009 and again a rise in 2010. If we try to interpret the book value per share of Prime bank, it increased continuously during the period of analysis except for year 2010. A slight dip is seen in year 2010 than that of year 2009. Both the company should have tight control over these stuffs.

Capacity Ratio: Prime Bank: Year 2007 2008 2009 2010

Capacity ratio

.73

.68

.72

.76

Goldman Sachs: As the net loans and leases are zero for 2007 to 2010, capacity ratio for Goldman Sachs is zero. This indicates the net loan and lease is zero for Goldman Sachs. So there is no liquidity requirement for Goldman Sachs.

capacity ratio(prime bank)

78% 76% 74% 72% 70% 68% 66% 64% 2007 2008 2009 2010 capacity ratio(prime bank)

Interpretation: Capacity ratio indicates the amount of loans and leases contribution in the total asset. In this regard, the figures show that except a slight dip in 2008, the ratio is pretty stable around the other years.

Current liquidity Index: Current liquidity index is the summation of cash assets and cash flow from operations in the numerator divided by current liabilities. Such a ratio, when it decreases over time, signals potential liquidity problems. So it is better to have a higher current liquidity index ratio. Goldman Sachs:

Year

2007

2008

2009

2010

CLI

.11

.058

.78

.31

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2007 2008 2009 2010 CLI(GS) CLI(Prime Bank)

Prime Bank
Year 2007 2008 2009 2010

CLI

0.0596

0.0529

0.70

.0375

Interpretation: Current liquidity index signals potential liquidity crisis and according to the analysis the company faces liquidity problems throughout the year. Current liquidity index was lowest in 2008 (Goldman Sachs), which is very low compare to other years In 2009, CLI was highest though it is very small than Prime Bank. In 2010, CLI of Goldman Sachs is again lessened than the year of 2009. The above all criteria states that Goldman Sachs faces liquidity problem through out the year of our analysis horizon. Cash Position Indicator: This ratio indicates cash. Higher the ratio, better the liquidity position. The formula for the ratio is- cash and deposits due from depository institution/total asset The company is very stable in terms of maintaining liquidity when it comes to holding cash assets. Throughout 2007-2010 it has managed to maintain a cash to total asset ratio around the same figure. Goldman Sachs: Year 2007 2008 2009 2010

Cash

position .011

.010

.014

.018

indicator

Cash position indicator (GS)

0.02 0.018 0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0 2007 2008 2009 2010 Cash position indicator (GS)

Prime Bank: Year Cash 2007 position .07 2008 .07 2009 .08 2010 .086

Indicator

Cash position indicator (Prime bank)

0.1 0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2007 2008 2009 2010 Cash position indicator (Prime bank)

Interpretation: Cash position indicator for both the banks has been stable. But for most of the year Prime Banks cash position has been better. Prime bank has picked up their cash position in 2010 and exceeded Goldman Sachs in every year. The Cash position Indicator for Goldman Sachs is also better in 2010.

Conclusion
In the end we found that there is no inconclusive result about which bank is in a better position. Because both banks have many financial positions very similar. In some cases like P/E ratio Goldman Sachs is performing better than Prime Bank in other case like capacity ratio Prime bank is performing is working much better than the previous one. Both banks have potentials but if they dont concentrate on their short term financing it is very likely that both of the banks may needed government intervention to recover from the situation created by on their own faults.