Ratio Analysis for Bankers

Ratio-analysis: Ratio-analysis means the process of computing, determining and presenting the relationship of related items
and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the
financial position of a unit. They are important tools for financial analysis.

1 Cost of Deposit (COD) = Interest on Deposit Total Deposit General Account is included (if any)
(Interest on Deposit + Total Operating
2 Cost of Fund (COF) = General Account is included (if any)
Expenses) Total Deposit
Yield or Yield on Interest on Loans & Advances Total
3 = General Account is included (if any)
Advances (YOA) Loans & Advances

Spread or Net Interest

4 = YOA-COD Difference between yield and cost
Spread (NIS)
Net Interest Margin
5 = Net Interest Income Loans & Advances NII=Interest Income Interest Expense
(NIM)
(Non Interest Expenses Non Interest
6 Burden Ratio = Negative result is better
Income) Total Assets
Advance to Deposit
7 = Total Loans & Advances Total Deposit Also known as Loan to Deposit ratio
Ratio (AD Ratio)
Classification Ratio (CL Total Classified Loans & Advances Total
8 = Rate of classified loans on specific loan portfolio
Ratio) Loans & Advances
Capital Adequacy Ratio
9 = RWA X 10% RWA= Risk Weighted Asset
(CAR)
EPS indicates the quantum of net profit of the year
Earnings Per Share Net Profit after Tax and Preference that would be ranking for dividend for each share of
10 =
(EPS) Dividend No. of Equity Shares the company being held by the equity share
holders.
Price Earnings Ratio PE Ratio indicates the number of times the Earning
11 = Market Price per Equity Share EPS
(P/E Ratio) Per Share is covered by its market price.
 Indication of how equity investors regard the
12 Market/Book Ratio Common Equity Shares Outstanding
company
(Total Assets Total Liabilities) Share
13 NAV per share Measures income per Taka of Assets utilized
Outstanding
Return on Investment
14 = Net Profit after Tax Total Investment Measures income per Taka of Investment
(ROI)
Return on Assets
15 = Net Profit after Tax Total Assets Measures income per Taka of Assets utilized
(ROA)
Return on Equity Net Profit after Tax Total Equity or
16 = Measures income per Taka of capital Employed
(ROE) Tangible Net Worth
Cost to Income Ratio Measures the ratio of cost to income for a specific
17 = Total Cost Total Income
(C/I Ratio) period
Balance Sheet Ratio or Financial Ratio
Measures short term solvency, that is ability to meet
short term obligations. It is the relationship
18 Current Ratio = Current Assets Current Liabilities
between current assets and current liabilities of a
concern. The ideal current ratio is 1.33
It is the ratio between Quick Current Assets and
Current Assets Inventories Current Current Liabilities. It should be at least equal to 1.
19 Quick Ratio (Acid Test) =
Liabilities Measures of a firms ability to meet short
obligations without relying on the sale of inventory.
The ratio indicates the extent to which Tangible
Tangible Net Worth or Owners Equity Assets are financed by Owners fund. The ratio will
20 Proprietary Ratio
Total Tangible Assets be 100% when there is no borrowing for
purchasing of Assets.
Total Debt or Long Term Liabilities It is the relationship between Borrowers fund and
21 Debt Equity Ratio
Tangible Net Worth or Total Equity Owners capital
Measures the percentage of funds provided by
22 Total Debt Ratio Total Debt Total Assets
creditors
23 Gross Working Capital Current Assets Capital required to maintain current assets
Net Working Capital It is the difference of Current Assets and Current
24 = Current Assets - Current Liabilities
(NWC) Liabilities.
People with a substantial net worth are known as
25 Net Worth Total Assets Total Liabilities
high net worth individuals
Income Statement Ratio or Operating Ratio
A higher GP Ratio indicates efficiency in production
26 Gross Profit Ratio (Gross Profit Net Sales) X 100
of the unit
27 Operating Ratio (Operating Profit Net Sales) X 100 Higher the ratio indicates operational efficiency
28 Net Profit Ratio (Net Profit Net Sales) X 100 It measures overall profitability
29 Profit Margin Net Income Sales Indicate Profit per Taka Sales
The ratio indicates how fast inventory is sold.
Stock/Inventory
30 Sales Average Inventory Higher is good in that case from the view point of
Turnover Ratio
liquidity
It shows how much of a decline in earnings a
31 Interest Coverage Ratio EBIT Interest Expenses
company can absorb
Balance Sheet & Income Statement Ratio or Composite Ratio
Measures how effectively the firm uses its tangible
32 Asset Turnover Ratio Net Sales Tangible Assets
assets
Total Assets Turnover Measures how effectively the firm uses its overall
33 Net Sales Total Assets
Ratio assets
Fixed Asset Turnover Measures how effectively the firm uses its plant and
34 Net Sales Fixed Assets
Ratio equipment
Current Asset Measures how effectively the firm uses its Current
35 Net Sales Current Assets
Turnover Ratio Assets
36 Basic Earning Power EBIT Total Assets Shows the raw earning power of the firms assets
before the influence of taxes and leverage
 Return on Equity Net Profit After Tax Tangible Net Worth
37 Measures income per Taka of capital employed
Capital (ROE) or Total Equity
Return on Assets
38 Net Profit After Tax Total Assets Measures the income per Taka assets utilized
(ROA)
EPS indicates the quantum of net profit of the year
Earnings Per Share Net Profit after Tax and Preference that would be ranking for dividend for each share of
39 =
(EPS) Dividend No. of Equity Shares the company being held by the equity share
holders.
Price Earnings Ratio PE Ratio indicates the number of times the Earning
40 = Market Price per Equity Share EPS
(P/E Ratio) Per Share is covered by its market price.
Debtors Turnover Total Credit Sales (Average Debtor + Indicates the times per year the debtors buy and
41
Ratio Average Bills) pay on average
Average Collection
42 365 Debtors Turnover Ratio The average day to pay by debtors
Period
Creditors Turnover
Indicates the times per year the creditors sales and
43 Ratio or Creditors ( Average Creditors Purchases) X 365
collect on average
Velocity Ratio
(Profit After Tax + Depreciation + Interest
Debt Service Coverage on Long Term Loans) (Interest on Long The ratio indicates the ability to meet liabilities by
44
Ratio (DSCR) Term Loans + Installments Payable on way of payments of installments of Term Loans
Long Term Loans)
Cost Volume Profit Analysis (CPV)
Sales Costs or The basic profit equation is
45 Profit
Sales (Variable Costs + Fixed Costs) P FC = Q X (SP - VC)
Contribution Margin Units Sold X (Net Sales Price Unit Can also be measured-
46
(CM) Variable Cost) Profit + Fixed Costs; or Sales Variable Costs
The point where revenue and expenses are equal
47 Break Even Point CM = FC
 Time Value of Money
PV (1 + r) n -when compounding
yearly PV = Present Value, r = Rate of Interest
48 Future Value (FV)
PV (1 + r/m)mn -when compounding n = Time Period, m = compounding times
monthly or quarterly
FV / (1 +r/m )mn or
49 Present Value (PV) C1/ (1+ r)1 + C2/ (1+ r)2 + C3/ (1+ r)3 + Present value of the future after tax cash flows
-----
P = The number of years after the initial investment
at which the last negative value of cumulative cash
flow occurs
C = Initial Investment
50 Payback Period P + (C-K) / N
K = The value of cumulative cash flow at which the
last negative value of cumulative cash flow occurs
N = The cash flow at which last negative value of
cumulative cash flow occurs
Net Present Value C1/ (1+ r)1 + C2/ (1+ r)2 + C3/ (1+ r)3 + The Present value of the future after tax cash flows
51
(NPV) .. - Outlay minus the investment outlay.
C1/ (1+ r)1 + C2/ (1+ r)2 + C3/ (1+ r)3 +
.. Outlay = 0
The discount rate that makes the present value of
IRR is usually found via trial & error the future after tax cash flows equal that investment
Internal Rate of Return method using two discount rate outlay. It is the expected rate of return.
52
(IRR)
NPVb-NPVa An investment is considered acceptable if its IRR is
IRR = a+ ----------------- (b-a) greater than Cost of Capital.
NPVa
**a & b is the first & second discount rate

Compiled by: Farhadur Reza,

BBA (Finance & Banking), MBA (CU),
LL.B., CCA (BTEB), PGD (CS), DAIBB