Chapter - 8
FINANCIAL ANALYSIS
Financial analysis is an evaluation of a firm's past financial performance and its prospects for the future. It consists of applying analytical tools and technical statements and other relevant data to obtain useful information. The financial statement with the attached schedules and director report on past performance and future prospects give rather insufficient information. The interested parties need fuller information. It is why the financial analysis has been developed. Its main purpose is to give a clear picture of the financial position by studying the relationship and comparisons between the items in the statement. Keeping in view its importance in financial analysis, I have used three 'instruments to evaluate the financial wealth of MCB. They are:
- Common Size Analysis
- Ratio Analysis
- Critical Analysis
- Tows Analysis
8.1 Common size analysis
In common size analysis, for, a given time period, each item in the income statement is restated as percentage of revenue earned .And for the balance sheet, for a given point in time, each item in the balance sheet is restated as percentage of total assets.
COMMON SIZE ANALYSIS OF BALANCE SHEET
2007 2006
(Restated)
Rupees in '000
ASSETS
Cash and balances with treasury banks 9.66 9.49
Balances with other banks 0.93 1.92
Lendings to financial institutions 0.26 6.16
Investments 27.55 18.55
Advances 53.34 57.95
Other assets 4.35 3.22
Operating fixed assets 3.90 2.65
Deferred lax asset - 0.05
100 100
LIABILITIES
Bills payable 2.95 2.35
Borrowings from financial institutions 11.08 7.95
Deposits and other accounts 82.19 85.46
Sub - ordinaled loans 0.13 0.53
Liabilities against assets subject to finance lease - -
Other liabilities 3.30 3.71
Deferred lax liabilities 0.33 -
TOTAL LIABILITIES 100 100
REPRESENTED BY
Share capital 1.76 1.81
Reserves 9.56 8.18
Unappropriated profit 1.44 1.84
1.78 11.84
surplus on revaluation of assets-net of tax 2.73 1.72
15.51 13.56
COMMON SIZE ANALYSIS OF INCOME STATEMENTS
2007 2006
(Restated)
Rupees in '000
Mark-up / return / interest earned 100 100
Mark-up / return / interest expensed 24.74 17.56
Nel mark-up / interest income 75.26 82.44
Provision against non-performing loans and advances – n 0.33 0.47
Provision for diminution in the value of investments 9.31 3.94
Bad debts written off directly 0.0006 0.18
9.64 4.59
Net mark-up / interest income after provisions 69.61 77.86
NON MARK-UP/INTEREST INCOME
Fee, commission and brokerage income 8.29 8.97
Dividend income 1.99 3.15
Income from dealing in foreign currencies 2.18 2.68
Gain on sale of securities-net 4.72 2.30
Unrealized loss on revaluation of in vestments (0.04) -
Classified as held for trading 17.5 2.2
Other income -net 18.9 19.3
Total noil- mark up / interest income 84.5 97.21
15.8 25.14
NON MARK-UP/INTEREST EXPENSES
Administrative expenses (0.01) 0.04
(reversals) /Other provisions -net 1.7 0.2
Other charges
17.4 25.45
Total noil- mark up / interest expenses - -
Extraordinary / unusual item - -
- - 17.4 25.45
PROFIT BEFORE TAXATION 67.03 71.76
Taxation
-current 17.94 22.11
-prior year (4.07) 2.30
-Deferred 2.81 0.24
19.0009 24.67
PROFIT AFTER TAXATION 48.02 47.10
Unappropriated profit brought forward 17.40 19.36
Transfer from surplus on revaluation of fixed assets –net of tax 0.03 0.12
17.44 19.48
Profit available for appropriation 65.46 66.59
8.2 RATIO ANALYSIS
A ratio is a quantitative relation between two magnitudes of the same kind. In ratio analysis, the financial ratios of the firm are compared to that of its competitors. This comparison allows the firm to detect major operating differences, which, if corrected, will increase its efficiency. Another very popular method of ratio analysis is to compare the firm's financial ratios to industry averages.
Before discussing the financial ratios, three cautions are in order:
- A single ratio does not generally provide sufficient in formations to judge the overall performance of the firm. Only if a group of ratios is used, a reasonable judgment concerning the firm’s overall financial state can be made.
- An analyst, when comparing financial statement, should ensure that predetermined uniform standards are used for this purpose.
- It must be insured that the data used in calculating financial ratios have been developed in the same manner and are sound and reliable.
There is no doubt that financial ratios are a useful guide for managerial decision-making but these are not exact and definite. Ratios only suggest the questions that need to be answered and provide no answers.
Let us now calculate some of the key financial ratios of MCB for the years 2006, and try to answer the questions that these ratios suggest.
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