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CHAPTER:1INRTODUCTION
After preparation of the financial statements, one may be interested in knowing the position of
an enterprise from different points of view. This can be done by analyzing the financial statement
with the help of different tools of analysis such as ratio analysis, funds flow analysis, cash flow
analysis, comparative statement analysis, etc. Here I have done financial analysis by ratios. In
this process, a meaningful relationship is established between two or more accounting figures for
comparison.
Financial ratios are widely used for modeling purposes both by practitioners and researchers.
The firm involves many interested parties, like the owners, management, personnel, customers,
suppliers, competitors, regulatory agencies, and academics, each having their views in applying
financial statement analysis in their evaluations. Practitioners use financial ratios, for instance, to
forecast the future success of companies, while the researchers' main interest has been to develop
models exploiting these ratios. Many distinct areas of research involving financial ratios can be
discerned. Historically one can observe several major themes in the financial analysis literature.
There is overlapping in the observable themes, and they do not necessarily coincide with what
theoretically might be the best founded areas.
Financial statements are those statements which provide information about profitability and
financial position of a business. It includes two statements, i.e., profit & loss a/c or income
statement and balance sheet or position statement.
The income statement presents the summary of the income earned and the expenses incurred
during a financial year. Position statement presents the financial position of the business at the
end of the year.
Before understanding the meaning of analysis of financial statements, it is necessary to
understand the meaning of „analysis‟ and „financial statements‟.
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Analysis means establishing a meaningful relationship between various items of the two
financial statements with each other in such a way that a conclusion is drawn. By financial
statements, we mean two statements- (1) profit & loss a/c (2) balance sheet. These are prepared
at the end of a given period of time. They are indicators of profitability and financial soundness
of the business concern.
Thus, analysis of financial statements means establishing meaningful relationship between
various items of the two financial statements, i.e., income statement and position statement
Parties interested in analysis of financial statements
Analysis of financial statement has become very significant due to widespread interest of various
parties in the financial result of a business unit. The various persons interested in the analysis of
financial statements are:-
Short- term creditors
They are interested in knowing whether the amounts owing to them will be paid as and when fall
due for payment or not.
Long –term creditors
They are interested in knowing whether the principal amount and interest thereon will be paid on
time or not.
Shareholders
They are interested in profitability, return and capital appreciation.
Management
The management is interested in the financial position and performance of the enterprise as a
whole and of its various divisions.
Trade unions
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They are interested in financial statements for negotiating the wages or salaries or bonus
agreement with management.
Taxation authorities
These authorities are interested in financial statements for determining the tax liability.
Researchers
They are interested in the financial statements in undertaking research in business affairs and
practices.
Employees
They are interested as it enables them to justify their demands for bonus and increase in
remuneration.
You have seen that different parties are interested in the results reported in the financial
statements. These results are reported by analyzing financial statements through the use of ratio
analysis.
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CHAPTER:2
BANK PROFILE
1. STATE BANK OF INDIA:
Type- Public (BSE, NSE:SBI) & (LSE:SBID)
Founded- Calcutta, 1806 (as Bank of Calcutta)
Headquarters- Corporate Centre, Madam Cama Road, Mumbai 400 021 India
Key people- Om Prakash Bhatt, Chairman
State Bank of India (SBI) (LSE: SBID) is the largest bank in India. It is also, measured by the
number of branch offices and employees, the second largest bank in the world. The bank traces
its ancestry back through the Imperial Bank of India to the founding in 1806 of the Bank of
Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of
India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a
60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake
held by the Reserve Bank of India.
SBI provides a range of banking products through its vast network in India and overseas,
including products aimed at NRIs. With an asset base of $126 billion and its reach, it is a
regional banking behemoth. SBI has laid emphasis on reducing the huge manpower through
Golden handshake schemes and computerizing its operations.
The State Bank Group, with over 16000 branches, has the largest branch network in India. It has
a market share among Indian commercial banks of about 20% in deposits and advances.
International presence
Regional office of the State Bank of India (SBI), India's largest bank, in Mumbai. The
government of India is the largest shareholder in SBI.
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The bank has 52 branches, agencies or offices in 32 countries. It has branches of the parent in
Colombo, Dhakka, Frankfurt, Hong Kong, Johannesburg, London and environs, Los Angeles,
Male in the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. It has offshore banking
units in the Bahamas, Bahrain, and Singapore, and representative offices in Bhutan and Cape
Town.
SBI operates several foreign subsidiaries or affiliates. In 1990 it established an offshore bank,
State Bank of India (Mauritius). It has two subsidiaries in North America, State Bank of India
(California), and State Bank of India (Canada). In 1982, the bank established its California
subsidiary, which now has seven branches. The Canadian subsidiary was also established in
1982 and also has seven branches, four in the greater Toronto area, and three in British
Columbia. In Nigeria, it operates as INMB Bank. This bank was established in 1981 as the Indo-
Nigerian Merchant Bank and received permission in 2002 to commence retail banking. It now
has five branches in Nigeria. In Nepal SBI owns 50% of Nepal SBI Bank, which has branches
throughout the country. In Moscow SBI owns 60% of Commercial Bank of India, with Canara
Bank owning the rest. In Indonesia it owns 76% of PT Bank Indo Monex. State Bank of India
already has a branch in Shanghai and plans to open one up in Tianjin.
2. INDUSTRIAL CREDIT & INVESTMENT CORPORATION OF INDIA (ICICI)
ICICI was formed in 1955 at the initiative of the World Bank, the government of India and
Indian industry representatives. The principal objective was to create a development financial
institution for providing medium-term and long-term project financing to Indian businesses.
Until the late 1980s, ICICI primarily focused its activities on project finance, providing long-
term funds to a variety of industrial projects. With the liberalization of the financial sector in
India in the 1990s, ICICI transformed its business from a development financial institution
offering only project finance to a diversified financial services provider that, along with its
subsidiaries and other group companies, offered a wide variety of products and services. As
India‟s economy became more market-oriented and integrated with the world economy, ICICI
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capitalized on the new opportunities to provide a wider range of financial products and services
to a broader spectrum of clients.
ICICI Bank was incorporated in 1994 as a part of the ICICI group. ICICI Bank‟s initial equity
capital was contributed 75.0% by ICICI and 25.0% by SCICI Limited, a diversified finance and
shipping finance lender of which ICICI owned 19.9% at December 1996. Pursuant to the merger
of SCICI into ICICI, ICICI Bank became a wholly-owned subsidiary of ICICI. ICICI‟s holding
in ICICI Bank reduced due to additional capital raising by ICICI Bank and sale of shares by
ICICI, pursuant to the requirement stipulated by the Reserve Bank of India that ICICI dilute its
ownership of ICICI Bank. Effective March 10, 2001, ICICI Bank acquired Bank of Madura, an
old private sector bank, in an all-stock merger.
The issue of universal banking, which in the Indian context means the conversion of long-term
lending institutions such as ICICI into commercial banks, had been discussed at length over the
past several years. Conversion into a bank offered ICICI the ability to accept low-cost demand
deposits and offer a wider range of products and services, and greater opportunities for earning
non-fund based income in the form of banking fees and commissions. ICICI Bank also
considered various strategic alternatives in the context of the emerging competitive scenario in
the Indian banking industry. ICICI Bank identified a large capital base and size and scale of
operations as key success factors in the Indian banking industry. In view of the benefits of
transformation into a bank and the Reserve Bank of India‟s pronouncements on universal
banking, ICICI and ICICI Bank decided to merge.
At the time of the merger, both ICICI Bank and ICICI were publicly listed in India and on the
New York Stock Exchange. The amalgamation was approved by each of the boards of directors
of ICICI, ICICI Personal Financial Services, ICICI Capital Services and ICICI Bank at their
respective board meetings held on October 25, 2001. The amalgamation was approved by ICICI
Bank‟s and ICICI‟s shareholders at their extraordinary general meetings held on January 25,
2002 and January 30, 2002, respectively. The amalgamation was sanctioned by the High Court
of Gujarat at Ahmedabad on March 7, 2002 and by the High Court of Judicature at Bombay on
April 11, 2002. The amalgamation became effective on May 3, 2002. The date of the
amalgamation for accounting purposes under Indian GAAP was March 30, 2002.
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The Sangli Bank Limited, an unlisted private sector bank merged with ICICI Bank with effect
from April 19, 2007. On the date of acquisition, Sangli Bank had over 190 branches and
extension counters, total assets of Rs. 17.6billion (US$ 440 million), total deposits of Rs. 13.2
billion (US$ 330 million), total loans of Rs. 2.0 billion (US$ 50million).
3. PUNJAB NATIONAL BANK (PNB) Punjab National Bank (PNB) was registered on May 19, 1894 under the Indian Companies Act
with its office in Anarkali Bazaar Lahore. The Bank, founded by Dyal Singh Majithia and Lala
Harkishen Lal, is the second largest government-owned commercial bank in India with about
4,500 branches across 764 cities. It serves over 37 million customers. The bank has been ranked
248th biggest bank in the world by Bankers Almanac, London. Total Business of the bank for
financial year 2007 is estimated to be approximately US$60 billion. It has a banking subsidiary
in the UK, as well as branches in Hong Kong and Kabul, and representative offices in Almaty,
Shanghai, and Dubai.
We are a leading public sector commercial bank in India, offering banking products and services
to corporate and commercial, retail and agricultural customers. Our banking operations for
corporate and commercial customers include a range of products and services for large
corporations, as well as small and middle market businesses and government entities. We offer a
wide range of retail credit products including housing loans, personal loans and automobile
loans. We cater to the financing needs of the agricultural sector and have created innovative
financing products for farmers. We also provide significant financing to other priority sectors
including small scale industries. Through our treasury operations, we manage our balance sheet,
including the maintenance of required regulatory reserves, and seek to maximize profits from our
trading portfolio by taking advantage of market opportunities.
Our revenue, which is referred to herein and in our financial statements as our income, consists
of interest income and other income. Interest income consists of interest on advances (including
the discount on bills discounted) and income on investments. Income on investments consists of
interest and dividends from securities and our other investments and interest from interbank loan
and cash deposits we keep with the RBI. Our securities portfolio consists primarily of
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Government of India and state government securities. We meet our statutory liquidity reserve
ratio requirements through investments in these and other approved securities. We also hold
debentures and bonds issued by public sector undertakings and other corporations, commercial
paper, equity shares and mutual fund units.
Our interest expense consists of our interest on deposits as well as borrowings. Our interest
Income and expense are affected by fluctuations in interest rates as well as the volume of
activity. Our interest expense is also affected by the extent to which we fund our activities with
low interest or non-interest deposits, and the extent to which we rely on borrowings.
Our non-interest expense consists principally of operating expenses such as expenses for wages
and employee benefits, rent paid on premises, insurance, postage and telecommunications
expenses, printing and stationery, depreciation on fixed assets, other administrative and other
expenses. Provisioning for non-performing assets, depreciation on investments and income tax is
included in provisions and contingencies
We use a variety of indicators to measure our performance. These indicators are presented in
tabular form in the section titled “Selected Statistical Information” on page [·]. Our net interest
income represents our total interest income (on advances and investments) net of total interest
expense (on deposits and borrowings). Net interest margin represents the ratio of net interest
income to the monthly average of total interest earning assets. Our spread represents the
difference between the yield on the monthly average of interest earning assets and the cost of the
monthly average of interest bearing liabilities. We calculate average yield on the monthly
average of advances and average yield on the monthly average of investments, as well as the
average cost of the monthly average of deposits and average cost of the monthly average of
borrowings. Our cost of funds is the weighted average of the average cost of the monthly average
of interest bearing liabilities. For purposes of these averages and ratios only, the interest cost of
the unsecured subordinated bonds that we issue for Tier 2 capital adequacy purposes (“Tier 2
bonds”) is included in our cost of interest bearing liabilities. In our financial statements, these
bonds are accounted for as “other liabilities and provisions” and their interest cost is accounted
for under other interest expenses.
Since 1969, when we became a public sector bank, we have managed to continue to grow our
business while maintaining a strong balance sheet. As of September 30, 2004, our total deposits
represented 85.9% of our total liabilities. On average, interest free demand deposits and low
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interest savings deposits represented 43.8% of these deposits in the first six months of fiscal
2005.These low-cost deposits led to an average cost of funds excluding equity for the first six
months of fiscal 2005 of 4.7%. As of September 30, 2004, our gross and net non-performing
assets constituted 7.65% and 0.30% of our gross and net advances, respectively. In fiscal 2004
our total income was Rs. 96.5 billion and our net profit was Rs. 11.1 billion before adjustment
and Rs. 10.6billion after adjustment as part of the restatement of our financial statements for this
Issue. In the first six months of fiscal 2005 our total income was Rs. 51.9 billion and our net
profit was Rs. 7.4billion. Between fiscal 2002 and 2004, our total income grew at a compound
annual rate of12.5%, ourunadjusted and adjusted net profit grew at a compound annual rate of
40.4% and37.4%, respectively, and our total deposits and total advances grew at a compound
annual growth rate of 17.1% and 17.2%, respectively.
We intend to maintain our position as a cost efficient and customer friendly institution that
Provides comprehensive financial and related services. We seek to achieve this by continuing to
adopt technology which will integrate our extensive branch network. We intend to grow by cross
selling various financial products and services to our customers and by expanding geographically
in India and internationally. We are committed to excellence in serving the public and also
maintaining high standards of corporate responsibility. In line with our philosophy of aiding
India‟s development we have opened branches in many rural areas.
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CHAPTER:3
OBJECTIVES
Analysis of financial statements is an attempt to assess the efficiency and performance of an
enterprise. For that there are some objectives which are described as under.
1. EARNING CAPACITY OR PROFITABILITY
The overall objective of a business is to earn a satisfactory return on the funds invested in it.
Financial analysis helps in ascertaining whether adequate profits are being earned on the capital
invested in the business or not. It also helps in knowing the capacity to pay the interest and
dividend.
2. COMPARATIVE POSITION IN RELATION TO OTHER FIRMS
The purpose of financial statements analysis is to help the management to make a comparative
study of the profitability of various firms engaged in similar business. Such comparison also
helps the management to study the position of their firm in respect of sales expenses, profitability
and using capital.etc.
3. EFFICIENCY OF MANAGEMENT
The purpose of financial statement analysis is to know that the financial policies adopted by the
management are efficient or not. Analysis also helps the management in preparing budgets by
forecasting next year‟s profit on the basis of past earnings. It also helps the management to find
out shortcomings of the business so that remedial measures can be taken to remove these
shortcomings.
4. FINANCIAL STRENGTH
The purpose of financial analysis is to assess the financial potential of business. Analysis also
helps in taking decisions;
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(a) Whether funds required for the purchase of new machinery and equipments are provided
from internal resources of business or not.
(b) How much funds have been raised from external sources.
5.SOLVECNY OF THE FIRM
The different tools of analysis tells us whether the firm has suffucient funds to meet its short-
term and long-term liabilities or not.
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CHAPTER:4
IMPORTANCE
Ratio analysis is an important technique of financial analysis. It is a means for judging the
financial health of a business enterprise. It determines and interprets the
liquidity,solvency,profitability,etc. of a business enterprise.
It becomes simple to understand various figures in the financial statements through the use of
different ratios. Financial ratios simplify, sumarise, and systemise the accounting figures
presented in financial statements.
With the help of raito analysis, comparision of profitability and financial soundness can be
made between one industry and another. Similarly comparision of current year figures can also
be made with those of previous years with the help of ratio analysis and if some weak points are
located, remidial masures are taken to correct them.
If accounting ratios are calculated for a number of years, they will reveal the trend of costs,
sales, profits and other important facts. Such trends are useful for planning.
Financial ratios, based on a desired level of activities, can be set as standards for judging
actual performance of a business. For example, if owners of a business aim at earning profit @
25% on the capital which is the prevailing rate of return in the industry then this rate of 25%
becomes the standard. The rate of profit of each year is compared with this standard and the
actual performance of the business can be judged easily.
Ratio analysis discloses the position of business with different viewpoint. It discloses the
position of business with liquidity viewpoint, solvency view point, profitability viewpoint, etc.
with the help of such a study, we can draw conclusion regardings the financial health of business
enterprise.
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CHAPTER:5
ADVANTAGES & LIMITATIONS
ADVANTAGES:
Ratio analysis is an important and age-old technique of financial analysis. The following are
some of the advantages of ratio analysis:
1. Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios
tell the whole story of changes in the financial condition of the business.
2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight
the factors associated with with successful and unsuccessful firm. They also reveal strong firms
and weak firms, overvalued and undervalued firms.
3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its
basic functions of forecasting. Planning, co-ordination, control and communications.
4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the
performance of different divisions of the firm. The ratios are helpful in deciding about their
efficiency or otherwise in the past and likely performance in the future.
5. Help in investment decisions: It helps in investment decisions in the case of investors and
lending decisions in the case of bankers etc.
LIMITATIONS:
The ratios analysis is one of the most powerful tools of financial management. Though ratios are
simple to calculate and easy to understand, they suffer from serious limitations.
1. Limitations of financial statements: Ratios are based only on the information which has been
recorded in the financial statements. Financial statements themselves are subject to several
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limitations. Thus ratios derived, there from, are also subject to those limitations. For example,
non-financial changes though important for the business are not relevant by the financial
statements. Financial statements are affected to a very great extent by accounting conventions
and concepts. Personal judgment plays a great part in determining the figures for financial
statements.
2. Comparative study required: Ratios are useful in judging the efficiency of the business only
when they are compared with past results of the business. However, such a comparison only
provide glimpse of the past performance and forecasts for future may not prove correct since
several other factors like market conditions, management policies, etc. may affect the future
operations.
3. Problems of price level changes: A change in price level can affect the validity of ratios
calculated for different time periods. In such a case the ratio analysis may not clearly indicate the
trend in solvency and profitability of the company. The financial statements, therefore, be
adjusted keeping in view the price level changes if a meaningful comparison is to be made
through accounting ratios.
4. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no
well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders
interpretation of the ratios difficult.
5. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make
a better interpretation, a number of ratios have to be calculated which is likely to confuse the
analyst than help him in making any good decision.
6. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have
to interpret and different people may interpret the same ratio in different way.
7. Incomparable: Not only industries differ in their nature, but also the firms of the similar
business widely differ in their size and accounting procedures etc. It makes comparison of ratios
difficult and misleading.
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CHAPTER:6
CONSOLIDATED BALANCE SHEET
1. STATE BANK OF INDIA
Consolidated Balance Sheet As On 31-March-2012
15
2. ICICI
Consolidated Balance Sheet As On 31-March-2012
16
3. PUNJAB NATIONAL BANK
Consolidated Balance Sheet As On 31-March-2012
CHAPTER:7
17
RATIO ANALYSIS
PROFITABILITY RATIO
A class of financial metrics that are used to assess a business's ability to generate earnings as
compared to its expenses and other relevant costs incurred during a specific period of time. For
most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a
previous period is indicative that the company is doing well.
Some examples of profitability ratios are profit margin, return on assets and return on equity. It is
important to note that a little bit of background knowledge is necessary in order to make relevant
comparisons when analyzing these ratios.
For instances, some industries experience seasonality in their operations. The retail industry, for
example, typically experiences higher revenues and earnings for the Christmas season.
Therefore, it would not be too useful to compare a retailer's fourth-quarter profit margin with its
first-quarter profit margin. On the other hand, comparing a retailer's fourth-quarter profit margin
with the profit margin from the same period a year before would be far more informative.
OPERATING MARGIN
A ratio used to measure a company's pricing strategy and operating efficiency. Operating margin
is a measurement of what proportion of a company's revenue is left over after paying for variable
costs of production such as wages, raw materials, etc. A healthy operating margin is required for
a company to be able to pay for its fixed costs, such as interest on debt. It Is Also known as
"operating profit margin."
Calculated as:
Operating margin= Operating Income
Net sales
Operating margin gives analysts an idea of how much a company makes (before interest and
taxes) on each dollar of sales. When looking at operating margin to determine the quality of a
company, it is best to look at the change in operating margin over time and to compare the
company's yearly or quarterly figures to those of its competitors. If a company's margin is
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increasing, it is earning more per dollar of sales. The higher the margin, the better. For example,
if a company has an operating margin of 12%, this means that it makes $0.12 (before interest and
taxes) for every dollar of sales. Often, nonrecurring cash flows, such as cash paid out in a lawsuit
settlement, are excluded from the operating margin calculation because they don't represent a
company's true operating performance.
RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 22.69%
2 ICICI 14.45%
3 PNB 21.47%
INTERPRETATION
It shows that operating efficiency of SBI is better than PNB and ICICI. While operating
efficiency of ICICI is lower than PNB and SBI. So rank of operating efficiency of banks can be
given as SBI, PNB and ICICI.
GROSS PROFIT MARGIN:
A financial metric used to assess a firm's financial health by revealing the proportion of money
left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as
the source for paying additional expenses and future savings. It is also known as "gross margin".
Calculated as:
Gross Profit Margin= Revenue−COGS
Revenue
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For example, suppose that ABC Corp. earned $20 million in revenue from producing widgets
and incurred $10 million in COGS-related expense. ABC's gross profit margin would be 50%.
This means that for every dollar that ABC earns on widgets, it really has only $0.50 at the end of
the day.
This metric can be used to compare a company with its competitors. More efficient companies
will usually see higher profit margins.
RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 21.49%
2 ICICI 12.99%
3 PNB 20.67%
INTERPRETATION
This ratio shows financial position of company. Here, financial position of SBI is better than
PNB and ICICI. So SBI is at first rank by its financial position than PNB and ICICI.
NET PROFIT MARGIN
For a business to survive in the long term it must generate profit. Therefore the net profit margin
ratio is one of the key performance indicators for your business.
The net profit margin ratio indicates profit levels of a business after all costs have been taken
into account. It is worth analysing the ratio over time. A variation in the ratio from year to year
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may be due to abnormal conditions or expenses. Variations may also indicate cost blowouts
which need to be addressed.
A decline in the ratio over time may indicate a margin squeeze suggesting that productivity
improvements may need to be initiated. In some cases, the costs of such improvements may lead
to a further drop in the ratio or even losses before increased profitability is achieved.
The calculation used to obtain the ratio is:
Net Profit Margin= Net PrpfitSales
×100
RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 11.67%
2 ICICI 10.51%
3 PNB 12.68%
INTERPRETATION
This ratio is key performance indicators for business. Key performance means the profit level of
company; from above graph we can say that performance of PNB is better than SBI and ICICI.
So profit level of PNB is at first rank than comes SBI and ICICI.
RETURN ON NETWORTH
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Return on Net worth (RONW) is used in finance as a measure of a company‟s profitability. It
reveals how much profit a company generates with the money that the equity shareholders have
invested. Therefore, it is also called „Return on Equity‟ (ROE)
It is expressed as:-
Net Income
RONW = ------------------------------------------- X 100
Shareholder‟s Equity
The numerator is equal to a fiscal year‟s net income (after payment of preference share
dividends but before payment of equity share dividends).The denominator excludes preference
shares and considers only the equity shareholding. So, RONW measures how much return the
company management can generate for its equity shareholders.
RONW is a measure for judging the returns that a shareholder gets on his investment as a
shareholder, equity represents your money and so it makes good sense to know how well
management is doing with it.
RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 13.72%
2 ICICI 8.94%
3 PNB 19.00%
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INTERPRETATION
This ratio is useful for comparing the profitability of a company to that of other firms in the same
industry. Here, profitability of PNB is more than SBI and PNB. So we can say that PNB is at
first rank by its profitability than comes SBI and ICICI.
LEVERAGE RATIO:
Any ratio used to calculate the financial leverage of a company to get an idea of the company's
methods of financing or to measure its ability to meet financial obligations. There are several
different ratios, but the main factors looked at include debt, equity, assets and interest expenses.
A ratio used to measure a company's mix of operating costs, giving an idea of how changes in
output will affect operating income. Fixed and variable costs are the two types of operating costs;
depending on the company and the industry, the mix will differ.
The most well known financial leverage ratio is the debt-to-equity ratio. For example, if a
company has $10M in debt and $20M in equity, it has a debt-to-equity ratio of 0.5
($10M/$20M). Companies with high fixed costs, after reaching the breakeven point, see a greater
increase in operating revenue when output is increased compared to companies with high
variable costs. The reason for this is that the costs have already been incurred, so every sale after
the breakeven transfers to the operating income. On the other hand, a high variable cost company
sees little increase in operating income with additional output, because costs continue to be
imputed into the outputs. The degree of operating leverage is the ratio used to calculate this mix
and its effects on operating income.
DEBT-EQUITY RATIO:
A measure of a company's financial leverage calculated by dividing its total liabilities by
stockholders' equity.
Debt-Equity Ratio= Total Liabilities
Shareholders Equity
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Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the
calculation. It is also known as the Personal Debt/Equity Ratio, this ratio can be applied to
personal financial statements as well as companies'.
A high debt/equity ratio generally means that a company has been aggressive in financing its
growth with debt. This can result in volatile earnings as a result of the additional interest
expense. If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without this outside
financing. If this were to increase earnings by a greater amount than the debt cost (interest), then
the shareholders benefit as more earnings are being spread among the same amount of
shareholders. However, the cost of this debt financing may outweigh the return that the company
generates on the debt through investment and business activities and become too much for the
company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For example,
capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2,
while personal computer companies have a debt/equity of under 0.5.
RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 10.96%
2 ICICI 5.27%
3 PNB 15.44%
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INTERPRETATION
This ratio indicates what proportion of equity and debt the company is using to finance its assets.
From above diagram we can say that PNB has a high debt-equity ratio means it is aggressive in
financing its growth with debt. Than after SBI has a low debt-equity ratio as comparison with
PNB and ICICI comes at third rank in debt-equity ratio.
FIXED ASSETS TURNOVER RATIO:
Measure of the productivity of a firm, it indicates the amount of sales generated by each dollar
spent on fixed assets, and the amount of fixed assets required to generate a specific level of
revenue. Changes in the ratio over time reflect whether or not the firm is becoming more
efficient in the use of its fixed assets. Formula: Sales revenue ÷ average fixed assets.
RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 6.31%
2 ICICI 5.61%
3 PNB 4.35%
INTERPRETATION
This ratio shows specific level of revenue by the amount of fixed assets. SBI has a high level of
revenue in comparison with ICICI and PNB. After SBI, ICICI has a high level of revenue and
than comes PNB at last.
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LIQUIDITY RATIO:
A class of financial metrics that is used to determine a company's ability to pay off its short-
terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of
safety that the company possesses to cover short-term debts.
Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow
ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some
analysts will calculate only the sum of cash and equivalents divided by current liabilities because
they feel that they are the most liquid assets, and would be the most likely to be used to cover
short-term debts in an emergency.
A company's ability to turn short-term assets into cash to cover debts is of the utmost importance
when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently
use the liquidity ratios to determine whether a company will be able to continue as a going
concern.
CURRENT RATIO:
This ratio is a rough indication of a firm's ability to service its current obligations. Generally, the
higher the current ratio, the greater the "cushion" between current obligations and your
Company's ability to pay them. The composition and quality of current assets is a critical factor
in the analysis of your Company's liquidity. It is calculated as Total current assets divided by
total current liabilities.
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RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 0.07%
2 ICICI 0.10%
3 PNB 0.02%
INTERPRETATION
Current ratio of ICICI is higher than SBI and PNB, means ICICI has a high ability to pay for its
liabilities, and than secondly comes SBI and PNB has a low ability to pay for liabilities in
comparison with ICICI and PNB.
QUICK RATIO:
It is also known as the "Acid Test" ratio; it is a refinement of the current ratio and is a more
conservative measure of liquidity. The ratio expresses the degree to which your current
Company's current liabilities are covered by the most liquid current assets. Generally, any value
of less than 1 to 1 implies a "dependency" on inventory or other current assets to liquidate short-
term debt.
It is calculated as Cash plus trade receivables divided by total current liabilities.
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RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 0.07%
2 ICICI 0.10%
3 PNB 0.02%
INTERPRETATION
PNB has a high quick ratio means it has enough current assets to cover its current liabilities,
while SBI and ICICI have a low quick ratio in comparison with PNB.
PAYOUT RATIOS:
The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio
to determine what companies are doing with their earnings.
Calculated as:
Payout Ratio= Dividends per ShareEarning Per Share
For example, a very low payout ratio indicates that a company is primarily focused on retaining
its earnings rather than paying out dividends. The payout ratio also indicates how well earnings
support the dividend payments: the lower the ratio, the more secure the dividend because smaller
dividends are easier to pay out than larger dividends.
DIVIDEND PAYOUT RATIO: Dividend payout ratio is the fraction of net income a firm pays
to its stockholders in dividends:
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Dividend Payout Ratio= Dividends
Net Income for the same period
The part of the earnings not paid to investors is left for investment to provide for future earnings
growth. Investors seeking high current income and limited capital growth prefer companies with
high Dividend payout ratio. However investors seeking capital growth may prefer lower payout
ratio because capital gains are taxed at a lower rate. High growth firms in early life generally
have low or zero payout ratios. As they mature, they tend to return more of the earnings back to
investors. Note that dividend payout ratio is a reciprocate ratio to dividend cover, which is
calculated as EPS/DPS.
RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 22.64%
2 ICICI 33.12%
3 PNB 23.40%
INTERPRETATION
ICICI has a high dividend payout ratio, so the Investors who are seeking high current income and
limited capital growth should be invest in ICICI bank. PNB and SBI have a low dividend payout
ratio, so investors who are seeking capital growth should be invest in PNB and SBI because
capital gains are taxed at a lower rate.
EARNING RETENTION RATIO:
The percent of earnings credited to retained earnings. In other words, the proportion of net
income that is not paid out as dividends.
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Calculated as:
Earning Retention Ratio= Net Income−Dividends
Nat Income
It can also be calculated as one minus the dividend payout ratio.
RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 77.33%
2 ICICI 66.35%
3 PNB 76.59%
INTERPRETATION
Earning retention ratio is the opposite of the dividend payout ratio. SBI and PNB have a high
earning retention ratio, so the Investors who are seeking high current income and limited capital
growth should be invest in SBI and PNB. ICICI has a low earning retention ratio, so the
investors who are seeking capital growth should be invest in ICICI BANK.
PERSHARE RATIOS
EARNIG PER SHARE:
The portion of a company's profit allocated to each outstanding share of common stock. Earnings
per share serve as an indicator of a company's profitability.
Calculated as:
Earnig Per Share=Net Income−DividendsOnPreffered Stock
Averag eOutstanding Shares
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When calculating, it is more accurate to use a weighted average number of shares outstanding
over the reporting term, because the number of shares outstanding can change over time.
However, data sources sometimes simplify the calculation by using the number of shares
outstanding at the end of the period.
Diluted EPS expands on basic EPS by including the shares of convertibles or warrants
outstanding in the outstanding shares number.
Earnings per share are generally considered to be the single most important variable in
determining a share's price. It is also a major component used to calculate the price-to-earnings
valuation ratio.
For example, assume that a company has a net income of $25 million. If the company pays out
$1 million in preferred dividends and has 10 million shares for half of the year and 15 million
shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from
the net income to get $24 million, and then a weighted average is taken to find the number of
shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M). An important aspect of EPS that's often
ignored is the capital that is required to generate the earnings (net income) in the calculation.
Two companies could generate the same EPS number, but one could do so with less equity
(investment) - that company would be more efficient at using its capital to generate income and,
all other things being equal, would be a "better" company. Investors also need to be aware of
earnings manipulation that will affect the quality of the earnings number. It is important not to
rely on any one financial measure, but to use it in conjunction with statement analysis and other
measures.
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RATIO AT 31-MARCH 2012
SR. NO. NAME OF BANK PERCENTAGE
1 SBI 117.33%
2 ICICI 42.56%
3 PNB 70.38%
INTERPRETATION
This ratio is an indicator of a company's profitability. From above graph we can say that SBI has
a high profitability than PNB and ICICI. So, PNB comes at second position and ICICI comes at
third position in profitability.
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