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# FINANCIAL RATIO ANALYSIS: Ratio analysis is an important and age-old technique of financial analysis.

However, the ratios are only indicators, they cannot be taken as final regarding good or bad financial position of the business other things have also to be seen. Most commonly used ratios in banking sector can be divided into following five main categories: Ratios and Their Analysis: Liquidity Ratios Leverage Ratios Profitability Ratios Activity Ratios Market Ratios Liquidity Ratios: Liquidity ratios measure a firms ability to meet its current obligations. These include: Current Ratio= Current Assets / Current Liabilities Year Total Current assets Total Current Liabilities Current Ratio 2008
406543703 363,489,463

2009
468170745 420,467,889

1.118

1.113

## 2 1.5 2008 1 0.5 0 2009 2010

Interpretation: As we know that current ratio is an important ratio which shows the solvency position of the organization, in above values we come to know that the value of current ratio is increasing in 2008 but in 2009 there is a little decrease in current ratio.again it is increasing in 2010 which is a healthy sign for bank. Working of Total current Assets and current Liabilities
Current Asset 2008 2009 2010

Cash and balances with treasury banks Balance with other Banks Lending to financial institutions Investments net Advances net

## 450407 1479 4402 213061 254551

923900
Total Current Asset Current Liabilities 406543703 468170745

8,201,090

10266

## Total Current Liabilities

363,489,463

420,467,889 467323

Acid Test Ratio= (Current Assets-Inventories- prepaid Expenses)/Current liabilities Year Cash and balances with treasury banks investments Pre-paid Expenses Current Liabilities Acid Test Ratio 2008 39,631,172 96,256,874
2612432 363,489,463

## 2009 38,774,871 167,134,465

2,889.208 420,467,889

0.367

0.483

## 0.6 0.5 0.4 0.3 0.2 0.1 0 2008 2009 2010

Interpretation: This ratio provides a more penetrating measure of liquidity than does the current ratio. Also known as the Quick ratio, it examines the businesss liquidity position by comparing current assets and liabilities but it omits stock from the total of current assets. The reason for this is stock is the most illiquid current asset In 2008 Acid Test Ratio is Low but in 2009 and 2010 it is increasing. Working Capital Ratio = (Current assets-Current liabilities)

## Year Current Assets

2008
406543703

2009
468170745 420,467,889

47702856

## 50000000 40000000 30000000 20000000 10000000 0 2008 2009 2010

Interpretation: It depends upon the size and nature of business. From the above analysis it is observed that the current assets of MCB are increase as compare to its liabilities as compare to previous years.

Leverage Ratios: Leverage ratios measure the degree of protection of suppliers of long term funds. Time interest Earned Ratio = earning before tax + interest exp/ interest exp Year EBIT Interest Expenses

## Time interest Earned 2.886 Ratio

2.462 times

2.459 times

2.9 2.8 2.7 2.6 2.5 2.4 2.3 2.2 2008 2009 2010

Interpretation: In 2008 the position of company to pay the interest payment is satisfactory & in 2009 it goes down, in 2010 it is also getting down. It Measure the firm's ability to meet interest payments out of its operating profit.

Debt ratio = (Total Liabilities /Total Assets) Year Total Liabilities Total Assets Debt Ratio 2008 385,179,850 443,615,904 0.87 2009 439,483,714 509,223,727 0.86 2010 489566 568770 0.86

0.87 0.868 0.866 0.864 0.862 0.86 0.858 0.856 0.854 2008 2009 2010

Interpretation: Measures the percentage of assets that have been financed by debt (borrowings). This ratio indicates that the value is decreasing, which is favorable for the bank. Ratio must be decrease for good health of the bank. Debt / Equity Ratio = (Total Liabilities /Shareholders equity) 385, 179, 85/1000 439,483,714/1000 Year Total Liabilities Total Equity Debt / Equity Ratio 2008 385,179.85 33459 11.5 2009 439,483.714 35037 12.5 2010 489566 55364 8.8 times

## 14 12 10 8 6 4 2 0 2008 2009 2010

Interpretation: In 2008 this ratio was 11.5 indicating that company has satisfactory equity resources to compete its short term and long term debt and in 2009 it become 12.5 and it is showing the companys strong equity position but in 2010 it decreased to 8.8, which indicates that company accept loan from the financial institution. It shows how much value there would be in a liquidation of the company.

Total Capitalization Ratio = Long term debt / Long term debt + equity Year 2008 2009 2010

21783

19016

33459

35037 0.35

## Total 0.39 Capitalization Ratio 21026337/1000 = 21026

Long term debt = (Other Liabilities + Deferred tax liabilities) 2008 Long term debt= (21346+ 437) = 21783 2009 Long term debt = (15819 + 3197) = 19016
2010 Long term debt = (16092 +4934) =21026

0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2008 2009 2010

Interpretation: It indicates long-term debt usage. Low debt and high equity levels in the capitalization ratio indicate
investment quality. This

ratio indicates that the value is decreasing, which is favorable for the

bank Profitability Ratios: Profitability ratios measure the earning ability of a firm. These include: Return on Assets (ROA) = (Net Profit / Total Assets) x 100

## 2010 16873 568770 2.96%

3.5 3.4 3.3 3.2 3.1 3 2.9 2.8 2.7 2008 2009 2010

Interpretation: The return on assets decreases first in 2009, than in 2008, which is favorable for the bank, as the bank is generating high return on assets.

DuPont Return on Assets = net profit margin *total asset turnover Year Net Profit total asset turnover DuPont Return on Assets 15,374,600/1000 15,495,297/1000 2008 15,375 0.0964 1482 2009 15,495 0.1014 1571 2010 16873 0.0903 1523

## Asset Turnover= Revenue / total Asset

2008 2009 2010 =40044 / 443,616 =0.0903 = 51616/ 509,224 = 0.1014 = 54821/568770 =0.0964

## (to plot on graph I divide it by 100)

15.8 15.6 15.4 15.2 15 14.8 14.6 14.4 14.2 2008 2009 2010

Interpretation: A combination of financial ratios is a series to evaluate investment return. The benefit of the method is that it provides an understanding of how the company generates its return. In 2009 decrease show that return on investment decrease.

Return on Operating Assets = Net profit / Operating Fixed Assets * 100 Year Net profit Operating Assets Return Operating Assets 2008 15,374,600 Fixed 15,374,600 on 95% 2009 15,495,297 18,014,896 86% 2010 16873 20947 80.55%

## 95 90 85 80 75 70 2008 2009 2010

Interpretation: It Measures the effectiveness of management at making a profit and using the assets efficiently. Increases in 2009, which means it is favorable for the bank. Return on Total Equity= Net profit / Total Equity *100 15,374,600/1000 = 15,374.600 15,495,297/1000 =15,495.297 Year Net profit Total Equity Return on Equity 2008 15,375 33459 Total 0.46 2009 15,495. 35037 0.44 2010 16873 55364 0.30

## 0.5 0.4 0.3 0.2 0.1 0 2008 2009 1010

Interpretation: Return on equity continuously decreases in 2009 and in 2010, which means it is unfavorable for the bank. The value of the ratio needs to be increase for healthy organizations.

Market Ratios:
Market ratios are commonly used by the investors to assess the performance of a business as an investment and also the cost of issuing stock. These include: Dividend per share = Total dividend / No. of outstanding shares

## 2010 7843 760 11.50

11.5 11.4 11.3 11.2 11.1 11 10.9 10.8 10.7 2008 2009 2010

Interpretation: Dividend per share (DPS) is the total dividends paid out over an entire year divided by the number of outstanding ordinary shares issued. in 2008 it was 11.50 and it decrease in 2009 at 11 in 2010 it increase again 11.50. Price earning ratio = Market value of per share / earning per share 2010: 228.54 / 22.20 2009: 219.68 / 20.38 2008: 125 / 20.22 Year 2008 Market value of 125 per share earning per share 20.22 Price earning ratio 6.18 =10.29 =10.77 =6.18 2009 219.68 20.38 10.77 2010 228.54 22.20 10.29

## 12 10 8 6 4 2 0 2008 2009 2010

Earnings per share= Net Income / total outstanding shares Year 2008 Net Income 15374 total outstanding 628 shares Earnings per share 20.22 2009 15495 691 20.38 2010 16873 760 22.20

## 22.5 22 21.5 21 20.5 20 19.5 19 2008 2009 2010

Interpretation: Investors are much interested to know whether a companys performance is increasing or decreasing. From an investors point of view, the organization earning per share is more important and investors can easily understand the firms profitability.