his ratio shows the earning ability of organi#ation. he operating efficiency of the firm and its ability to ensure adequate return to its shareholders depends ultimately on the profits earned by it. he profitability of the firm can be measured by its profitability ratio. In other words profitability ratios designed to provide answers to questions such as
a@ Is profit earned by the firm adequate4 b@ hat rate of return does it represents4
c@ hat is the rate of profit for various divisions and segments of the firm4 d@ hat is the rate of return to equity shareholders4
he profitability of the firm can be determined on the following ratios
1. atio of Net profit to total income
his ratio implies that the percentage of profit earned by the organi#ation
5ut of its income.
U Eet profit
V 177
otal income
?!upees
in lakhs@
:ear 2779277< 277<2776 27762770
rofit ?!s@ 37037 99339 6<7<6
otal income?!s@ +72609 +<6+ 3300+2
!atio ?O@ 19.62O 1<.<O 13.33O
Interpretation
he ratio of profit to total income in the first year ?27797<@ was 19.6O and in 7<76 ratio increased 1<.<O due to increase in interest income and non interest
income but in 277670 ratio decreased 13.33O because there was loss on revaluation of investment and increase in e-penses.
". atio of Net profit to total deposit
his ratio shows organi#ation earning on deposits
?!upees in lakhs@
:ear 2779277< 277<2776 27762770
rofit ?!s@ 37037 99339 6<7<6
Ratio of Net profit to total income
16.82%
otal %eposit ?!s@ +77669 +9+323 33<0962
!atio ?O@ 1.9<O 1.6+O 1.39O
Interpretation
he ratio of profit to deposits in the year 797< was 1.9<O it was increased in 7<
76 by 1.6+O and it decreased to 1.39O compared to last year it was more. his shows that the deposits have increased at a faster rate than income.
&. atio of return on e4uity
his ratio measures the return on the owners ?both equity and preference shareholders@ invested in the firm.
U )
Eet worth ?rupees in lakhs@
:ear 2779277< 277<2776 27762770
rofit ?!s@ 37037 99339 6<7<6
Eet worth ?!s@ 161367 +72+6 633
!atio ?O@ 26.73O 10.39O 10.3<O
Ratio of net profit to total deposit
1.67%
Interpretation
!eturn on equity in the first year was 26.73O it has decreased to 10.39O to 10.3<O in the year 7<76 and 7670 compared to first year. !eturn on equity is constant for the year. his indicates generation of return for capital invested by owner of the company is constant for last two year. 'a"or portion of net profit is transfer to general reserve which leads to decrease in the return of shareholder.
*. eturn on 'sset
)n indicator of how profitable a company is relative to its total assets. !5) gives an idea as to how efficient management is at using its assets to generate earnings. &alculated by dividing net income by its total assets
U Eet income
otal )ssets ?rupees in lakhs@
:ear 2779277< 277<2776 27762770
rofit ?!s@ 37037 99339 6<7<6
otal )ssets ?!s@ 2+7900 312077 <+379+0
!atio ?O@ 1.27O 1.20O 1.16O
Interpretation
!atio of return on asset in first year was 1.27O and in second year it increased to 1.20O it indicates that company is better at converting its investment into profit but in third year earning generated from invested capital has been reduced to
1.16O this indicates company is slow in converting its investment into profit.
5. eturn on capital employed
his ratio shows the return on capital employed ?share capital, reserve, retained earning and long term borrowings@ used in the organi#ation.
U B ?profit before ta-@
&apital employed ?rupees in
lakhs@
:ear 2779277< 277<2776 27762770
B ?!s@ <1609 0<60 123+31
&apital employed
?!s@
12+92 6102+0 <+7<7+
!atio ?O@ 1<.+O 11.0O 1<.13O
Ratio of return on assets
1.20%
Interpretation
!eturn on capital for the first year 797< was 1<.+O which was decline in second year and increased in third year by 1<.13O. his indicates that earning capacity of the capital employed is satisfactory because of borrowing and long term debts are increased.
7. Net interest %argin
Eet interest margin is the gross margin on a banks lending and investment activities. It tells you the average interest margin that the bank is receiving by borrowing and lending funds. It is determined as.
Eet interest income U total interest income total interest e-pense U Eet interest income V 177
otal earning assets
:ear 2779277< 277<2776 27762770
Eet interest income ?!s@
1++<66 1<<<0+ 2336
otal asset ?!s@ 2+7900 312077 <+379+0
!atio ?O@ +.19O +.3O +.9O
Ratio of return on capital employed
17.43%
Interpretation
!atio of net interest margin in first year was +.19O it has increased in constant rate by +.3O and +.9O in second and third year. his indicates that average interest margin the bank is receiving by borrowing and lending fund is constant and satisfactory.
F. atio of interest income to average 0or:ing fund
It is a ratio of interest income to average working fund. It shows how income is earned from average asset.
)verage working fundU opening total asset W closing total asset / 2
Interest income
U V 177
)verage working fund
?!upees in lakhs@
Net interest margin
3.16%
3.45% 3.46%
3.00%
3.10%
3.20%
3.30%
3.40%
3.50%
2006-2007 2007-2008 2008-2009 Year
P e r c e n t a g e
Ratio (%)
Interest
!atio of interest income to )F in first year was <.7O in second year it was 9.97O and it increased in third year by <.19O compared to previous year. Increase in interest income due to increase in interest/ discount on advance, income from investment. his also indicates interest earned is more.
H. atio of non6interest income to 'verage 0or:ing fund
his ratio is determined by dividing noninterest income by )F.
his tells how much is the noninterest income ?other income@ from average working fund.
U Eoninterest income V 177 )verage working fund
Ratio of interest income to AWF
7.00%
?!upees in lakhs@
:ear 2779277< 277<2776 27762770
Eon interest income?!s@
677+ 931+ 112+06
)F ?!s@ +9+933+.3 969<00.3 929<90.3
!atio ?O@ 1.+2O 1.+6O 1.<0O
Interpretation
!atio of non interest income to )F in 797< was 1.+2O and it increased to 1.+6O to 1.<0O in 7<76 and 7670 because of increase in profit on sale of investment, commission, e-change M brokerage, 'iscellaneous income etc.increase in non interest income increase the profitability of the firm. here is significant growth in non operating income in year 2770.
Ratio of non interest income to AWF
1.!" 1.#"
. atio of Cash $ividend to Net income
) cash dividend to net income indicates how much of earnings are paid out to shareholders. &onversely, it indicates how much of earnings are retained to build the banks capital account. Cmaller banks, because they have limited capital market access, tend to rely more heavily on earnings retention to build capital.
&ash %ividend Eet income
?!upees in lakhs@
:ear 2779277< 277<2776 27762770
&ash dividend
?!s@
XX 29 XX
Eet income?!s@ 37037 99339 6<7<6
!atio ?O@ XX XX
&ash dividend for 797< is not paid. %ividend of previous is paid in 7<76 29Jac is paid out of net income. In 27762770 dividend is not declared
1D. EPS >earning per share?
It measures the profit available to equity shareholders on a per share basis, that is, the amount that they can get on every share held. It is calculated by dividing the profits available to shareholders by the number of outstanding shares. he profits available to the ordinary shareholders are represented by net profits after ta-es and preference dividend. hus
>C U ) ?profit after ta-@
Eumber of shares outstanding
:ear 2779277< 277<2776 27762770
) ?!s@ 37037 99339 6<7<6
>arning per share in 797< was 1<.03 !s. it increased by 22.01 and 2<.01 !s. for last two years. >C simply shows the profitability of the firm on a per share basis.
II. perating ratio
2006-2007 2007-2008 2008-2009 Year
P e r c e n t a g e
Ratio (Rs)
his ratio gives the operation efficiency of the organi#ation. he efficiency can be determined by following ratios.
1. atio of interest earned to interest paid
his ratio shows the percentage of interest earned on loans and advances and interest paid on deposits.
U Interest earned Interest paid
?!upees in lakhs@
:ear 2779277< 277<2776 27762770
Interest earned
?!s@
2360+ +70+0 <3+
Interest paid ?!s@ 121173 1+1339 102037
!atio ?times@ 2.17 2.+3 2.+1
Interpretation
!atio of interest earned to interest paid in first was 2.17O that was very less compared to second year it grew to 2.+3O and third year decline by O because interest paid on borrowing was more. Firms earning capacity is satisfactory.
Ratio of interest earned to interest paid
2.1
2006-2007 2007-2008 2008-2009 Year
P e r c e n t a g e
Ratio (times)
". atio of interest paid to total income
his ratio shows the percentage of interest paid to deposits accepted.
U interest paid
V 177
otal income
?!upees in lakhs@
:ear 2779277< 277<2776 27762770
Interest paid ?!s@ 121173 1+1339 102037
otal income ?!s@ +72609 +<6+ 3300+2
!atio ?O@ +0.06O +3.1+O +.3O
Interpretation
!atio of interest paid on total income in first year was +0.06O and second and third year was constant. In first interest paid on borrowing was more by this even the interest earned was decline. Cecond and third year, firms interest paid is constant it is satisfactory.
&. atio of staff expense to total expense
his ratio shows the percentage of staff e-pense to total e-pense.
U Ctaff e-pense
Ratio of interest paid on total income
39.98%
otal e-pense
?!upees
in lakhs@
:ear 2779277< 277<2776 27762770
Ctaff e-penses
!atio of staff e-penses to total e-penses in the year 797< was 6.17O it has been increased to 6.06O to 17.20O in the last two year. his indicates payment for the employees are increasing. $ence profit per employee is increasing.
*. atio of total expenditure to total income
his shows the percentage of total e-penses to total income Ratio of staff epenses to total
epenses
U otal e-penditure
V 177
otal income
:ear 2779277< 277<2776 27762770
otal e-penditure
?!s@
23109 +7<02< <263
otal income ?!s@ +72609 +<6+ 3300+2
!atio ?O@ 6+.1<O 62.22O 6.O
Interpretation
he ratio of total e-penditure to total income in the year 797< was 6+.1<O and it was decreased in the second year by 62.22O but in third year total e-penditure increased to 6.O because of increase in interest e-penses , operating e-penses and there was loss on revaluation of investments.
5. atio of operating expenses to 'verage 0or:ing fund
5perating e-pense are those e-penses which are connected to running of the organi#ation it includes staff salary, rent, ta-es, printing and stationary, advertisement etc. this ratio shows the percentage of operating e-penses to )F.
U 5perating >-penses V 177 )verage working fund
:ear 2779277< 277<2776 27762770
5perating e-penses?!s@
61777 17637 190170
)verage working fund ?!s@
+9+933+.3 969<00.3 929<90.3
!atio ?O@ 2.22O 2.+1O 2.<7O
Interpretation
!atio of operating e-penses to )F in first year was 2.22O it has increased to 2.+1O to 2.<7O in 7<76 and 7670 due to increase in !ent, ta-es, lightning, printing M stationary, )dvertisement and publicity, !epairs and maintenance etc.)long with interest income and non interest income even operating e-penses is growing year by year. By this percentage of profit will decrease.
Ratio operating epense to AWF
2.22% 2.31%
2.70%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
2006-2007 2007-2008 2008-2009 Year
P e r c e n t a g e
Ratio (%)
7. atio of interest expenses to 'verage 0or:ing fund
his ratio is determined by dividing interest e-penses to )F. It indicates what percentage or rate of interest is paid from working fund.
U Interest >-penses V 177 )verage working fund
:ear 2779277< 277<2776 27762770
Interest e-p?!s@ 121173 1+1339 102037
)verage working fund ?!s@
+9+933+.3 969<00.3 929<90.3
!atio ?O@ +.++O 2.67O +.76O
Interpretation
!atio of interest e-penses to )F in 797< was +.++O and in second year it decrease to 2.67O and in third year it increased to +.76O compared to last year due to increase in interest e-penses and operating e-pense. If we compare interest income and interest e-pense, the percentage of interest paid is more than interest earned so it is unfavorable.
III. Solvency ratio
his ratio helps to know the liquidity of the firm i.e. ability to meet its short term obligations or current liabilities. he solvency of the firm can be determined in the following ratios.
1. atio of Total cash to total deposits
his ratio helps to find what e-tent the deposits used and cash balance in hand. he conversion into cash while payment of deposits is very important for any bank. If there is more need of deposit liquidity the bank as to keep more funds in cash. his ratio can be calculated with the following formula.
Ratio of interest epenses to AWF
3.33%
U otal &ash
V 177
otal deposits
?!upees
in lakhs@
:ear 2779277< 277<2776 27762770
otal cash ?!s@ 23106 29371+ ++7991
otal deposits ?!s@ +77669 +9+323 33<0962
!atio ?O@ 6.+3O <.26O 3.02O
Interpretation
!atio of cash to total deposits in the first year 797< was 6.+3O it was decreased by <.26O to 3.02O in 7<76 and 7670. &ompared to the first year ratio has
reduced year by year it indicates that firm has no idle fund in bank. But still firm has to maintain cash reserve to meet its current obligation.
Ratio of total cas- to total deposits
8.35%
". atio of investment to total deposits
his ratio shows at what e-tent the firm invested its deposits on securities from its total deposits.
U otal investment
V 177
otal deposits
:ear 2779277< 277<2776 27762770
otal investment
?!s@
10+9+9 10+061 26+0+09
otal deposits ?!s@ +77669 +9+323 33<0962
!atio ?O@ 9+.+2O 3+.22O 37.66O
Interpretation
!atio of total investment to total deposits for the first year stood at healthy i.e.
9+.+2O and in second and third year it decreased to 3+.22O to 37.66O because of decreased shares received, other approved securities and decreased in certificate of deposits.
&. Credit deposits ratio
his ratio shows the percentage of loans and advances provided by bank from its deposits. his ratio is purely depending upon the lending policy of the bank and also the loan requirements of bank customer. If there is increase in loans demand higher then the likely rise in deposits the bank has to keep more of its funds in liquid assets to meet the increase in the loan demand and this is also depending upon the nature of loan and type of deposit of the bank.
U loans and advances
otal deposits
:ear 2779277< 277<2776 27762770
Joan and 1<<31 23399+7 +379129
Ratio of total in/estment to total deposits 63.32%
advance ?!s@
!atio of credit to deposits in 797< was 7.36 times and it was increased in 7<
76 by 7.<7 times but in 7670 it decreased to 7.92 times compare to previous year it was more. his indicates that banker has lag behind in the loan and advances. herefore measures are to taken to increase the loan and advance to the customer.
2006-2007 2007-2008 2008-2009 Year
P e r c e n t a g e
Ratio (times)
*. atio of loans to Total assets
he loans to total assets ratio measures the total loans as a percentage of total assets. he higher this ratio indicates a bank is loaned up and
its liquidity is low. he higher the ratio more risky the bank may be to higher defaults
.
his figure is determined as follows8U Joans V 177
otal asset
:ear 2779277< 277<2776 27762770
otal loan ?!s@ 13373 270179+ ++960
otal )ssets ?!s@ 2+7900 312077 <+379+0
!atio ?O@ +.+0O 7.93O 3.62O
Interpretation
!atio of loans to total assets in first year was +.+0O it increased to 7.93O to
3.62O in last two year. Increase in loan out of total asset indicates bank is loaned up and its liquidity is low. his show that bank is at risk side by this E) also increases over a period of time. his may also affect the earning of
the bank and bank may not be able to recover interest and principal amount.
Ratio of total loans to total assets
34.39%
40.65%
45.82%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
2006-2007 2007-2008 2008-2009 year
p e r c e n t a g e
Ratio (%)
5. atio of provision for loan losses to 'verage assets
he provision for loan losses to average assets is a charge to current earnings to build the allowance for loan and lease losses. he )JJ is a general reserve kept by the bank to absorb loan losses. his important figure is a reserve account to cover une-pected default on loans by borrowers. hese are generally referred to as nonperforming loans.
U rovision for loan loss V 177 )verage assets
:ear 2779277< 277<2776 27762770
rovision for loan loss ?!s@
1<626 1<922 <0<9
)verage )ssets?!s@
+9+933+.3 969<00.3 929<90.3
!atio ?O@ 7.0O 7.+<O 7.<9O
Interpretation
!atio of provision for loan loss to average asset in 797< was 7.0O and in second year it was 7.+<O and it increased in third year by o.<9O loan loss on average assets ?its means if one $undred !upees is average asset 7.<9 paise is loan loss@. 'oreover, there is sufficient loan loss reserve to absorb probable loan losses.
I). Safety atio
1. atio of Net NP' to Net 'dvances
Ratio of pro/ision for loan loss to A/erage asset
0.49%
0.37%
0.76%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
2006-2007 2007-2008 2008-2009 Year
P e r c e n t a g e
Ratio (%)
he ratio of E)s to advances reflects the quality of a banks loan portfolio. ) distinction is often made between gross E) and net E). Eet E), which is obtained by deducting from gross E) items like interest due but not recovered, part payment received and kept in suspense account, etc. is internationally accepted as the more relevant indicator of financial health of banks. If the E) is increasing it shows Bad sign to the organi#ation.
U Eet E) V177
Eet advances
:ear 2779277< 277<2776 27762770
Eet E) ?!s@ 2<03 979+ 13316
Eet )dvances?!s@ 1<<31 23399+7 +379129
!atio ?O@ 7.13O 7.2+O 7.O
Interpretation
!atio of Eet E) to Eet )dvances in 797< was 7.13O and in second and third year
Ratio of net NPA to net Ad/ance
0.15%
2006-2007 2007-2008 2008-2009 Year
P e r c e n t a g e
Ratio (%)
$as increased to 7.2+O to 7.O because of increase in total loan even E) has increased over a period of time. $owever this ratio is satisfactory with industry norms where on an average this ratio is +3O. his ratio tells the credit quality of the bank.
". Capital 'de4uacy atio
&apital adequacy is a key element in maintaining the stability of banking corporations. ) crucial though not the only tool for testing capital adequacy is the maintenance of a minimum ratio of capital to the weighted risk elements of banking business. $owever, it must be emphasi#ed that the minimum ratio
required in this regulation is not necessarily the optimum ratio, and most banking corporations are e-pected to maintain a higher ratio.
he following are the current minimum capital adequacy ratios8
• ier one capital to total risk weighted credit must not be less than O.
• otal capital ?tier one plus tier two less certain deductions@ to total risk weighted credit e-posures must not be less than 6O.
Tier 1 Capital9 In relation to the capital adequacy ratio, tier one capital can absorb losses without a bank being required to cease trading. his is core capital, and includes equity capital and disclosed reserves. In other words, this ratio is designed to indicate the amount of equity or capital support or assets that can protect the bank from une-pected events.
Tier " Capital9 In relation to the capital adequacy ratio, tier two capital can absorb losses in the event of a windingup, and so provides a lesser degree of protection to depositors. It includes items such as undisclosed reserves,
general loss reserves, and subordinated term debt.
Tier 1 Capital
&apital U includes paid up capital, statutory reserve, general reserve, balance in profit and loss account and amalgamation reserve. %eferred asset if any deducted
ier 1 &apital V 177
otal !isk eighted )sset
:ear 2779277< 277<2776 27762770
&apital ?!s@ 2220<7 +09219 31001
otal !isk weighted asset
?!s@
2<<<+62 12<17+ 9721<92
!atio ?O@ 6.7+O 0.97O 6.33O
Tier "
&apital U includes general loss reserve, investment fluctuation reserve and subordinated debt.
ier 2 &apital V177
otal !isk eighted )sset
:ear 2779277< 277<2776 27762770
&apital ?!s@ 177612 173<+ 1<27<1
otal !isk weighted asset
?!s@
2<<<+62 12<17+ 9721<92
!atio ?O@ +.92O 2.39O 2.69O
/ear Tier 1 Capital Tier " Capital Total Capital 'de4uacy atio
2779277< 6.7+O +.92O 11.99O
277<2776 0.97O 2.39O 12.19O
27762770 6.33O 2.69O 11.1O
Interpretation
otal capital adequacy ratio for 2779277< was 11.99O which is not less 6O and in second year it increased to 12.19O and third year it decreased to 11.1O compared to second year but capital adequacy ratio is more than 6O so it can absorb losses in the event of a windingup, and also provide protection to
otal capital adequacy ratio for 2779277< was 11.99O which is not less 6O and in second year it increased to 12.19O and third year it decreased to 11.1O compared to second year but capital adequacy ratio is more than 6O so it can absorb losses in the event of a windingup, and also provide protection to