HARAMAYA UNIVERSITY

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING & FINANCE

A RESEARCH PROPOSAL IN PARTIAL FULFILMENT OF THE

REQUIRMENT OF BA DEGRE IN ACCOUNTING & FINANCE

EVALUATION OF FINANCIAL PERFORMANCE COMMERCIAL BANK OF

ETHIOPIA(in case Haramaya Branch)

PREPARED BY: AHMED MOHAMMED

Advisor: - ATO MILLION GIZAWU

June 2018

Haramaya, Ethiopia
 ABSTRACT

This study will be conduct to evaluate the financial performance of commercial

bank of Ethiopia in case of Haramaya Branch The question which have been raise
in this paper are related to the ability of the Bank to meet its Obligation in the
short runs‚ the extent to which commercial Bank use borrowed funds to finance the
company‚ the ability of the commercial Bank to manage and utilize its total assets
to generate revenue‚ the capacity in generating adequate interest income to cover
its expenses and earn a profit.

The main objective of the study will to assess the financial performance of the
commercial banks by using different financial tools and provide the possible
suggestion based on it.

This Proposal will be designed in descriptive method and mainly quantitative data
will be used. Both secondary and primary source of data will be used to collect the
required information. The secondary data are taken from the audited annual
financial statement of commercial bank and primary data will be collected through
interviews with the bank manager for further information verification.

The proposal will analyse the data by using different ratio’s and other descriptive
analysis like tables and graphs. Finally‚ the research will be arrives at some
finding and recommendations.
 Table of contents page

Chapter one: Introductions

1.1.Back ground of the study……………………………………..1
1.2.Statement of the problem…………………………………….1
1.3.Objective of the study………………………………………….2
1.4.Significance of the study………………………………………2
1.5.Methodology of the study………………………………………2
1.5.1 Research design………………………………………………2.
1.5.2 Data collection methods…………………………………….3
1.6 Scope of limitation………………………………………………….3
1.7 Organization of the study……………………………………3
Chapter Two: literature review
2.1. Introduction ……………………………………………………..4
2.2. Overview of financial statement…………………………………..4
2.2.1 Demand for company financial statement……………4
1.2.2 Types off financial statements………………………………5
2.3. Financial analysis definition…………………………………….7
2.3.1 Purpose of financial statement analysis……………………7
2.3.2 User of financial analysi…………………….……….7
2.4. Ratio analysis……………………………………………………..8
2.4.1 User of financial ratio analysis……………………………8
2.4.2 Objective of ratio analysis………………………………..9
2.4.3 Classification of ratio analysis ……………………….9
2.4.3.1 Liquidity ratio……………………………………….9
2.4.3.2 Efficiency…………………………………..…….10
2.4.3.3 Leverage (turn-over) ratio……………………..11
2.4.3.4 Profitability ratio…………………………………..12
 2.5 Limitation of ratio analysis…………………….………………13
2.6 Overview of the bank…………………………….……………13
2.6.1 Definition of the bank ……………….…………….13
2.6.2 Banks financial statement…………………………………14
CHAPTER THREE: Reaserch methodology and analysis
3.1 Overview of commercial Bank of Ethiopia………………15
3.1.1 Background………………………………………………………….15
3.1.2 Accounting policy of CBE…………………………………….16
3.2 Data analysis…………………………………………………19
3.2.1 Income analysis…………………………………………………19
3.2.2 Expense analysis…………………………………………………20
3.2.3 Deposit analysis……………………………………………………21
3.2.4 Ratio analysis…………………………………………………21
3.2.4.1 Liquidity ratio………………………………………..21
3.2.4.2 Activity ratio…………………………………………22
3.2.4.3 Leverage ratio………………………………………23
3.2.4.4 Profitabilityratio……………………………………24

CHAPTER FOUR
4.Cost and Time Plan--------------------------------------------------------------------------

4.1 Time Schedule-------------------------------------------------------------------------------

4.5 Financial Budget-----------------------------------------------------------------------------

CHAPTER ONE
INTRODUCTION

1.1 Back ground of study

The first commercial bank of Ethiopia was established bank of Abyssinia in 1905,
under the partnerships of Ethiopia government and the national bank of Egypt. The
bank continued to operate until 1931. And later on the government of Ethiopia
purchased and renamed `the bank of Ethiopia` this also operates until the Italian
invasion in 1936.

In 1963 commercial bank of Ethiopia was legally established. As a share company,

to take over the commercial banking activities of the state bank of Ethiopia and to
carry on all types of banking business and operations competing with other banks.
The bank was established in accordance to the licensing and supervision of
banking business proclamation No 84/1994 of Ethiopia to undertake commercial
banking of activities.

1981-1993: in this period. CBE was in monopoly era dominating the banking
business all over the country.

1994-1998: this period was characterized by the country`s shift from a command
economy to market oriented economy: due to a policy redirection.

1998-2000: as the business environment, Continued to became increasingly

competitive due to the establishment of private banks. CBE commissioned a
comprehensive audit program (CAP) with the renowned expatriate. Consulting
firm: Ernst & young.

2000-onwards: the bank has commissioned a financial audit with an audit with an
audit firm KPMG in East Africa LTD. As prerequisite to the management
consultancy program, the bank actually concluded a management consultancy
contract with the bank of Scotland (Ireland) on April 16, 2003. Currently, the
commercial Bank of Ethiopia is the leading bank in the country. The bank`s
leading position is expressed by the virtue of its:

- Market share
- Volume of business
- Wide customer base
- Wide branch network
- Strong relationship with internationally acclaimed banks.
- Asset size &
- Capital base

Now a day through the head office in Addis Ababa and about 303 branches exist in
the country.

CBE`s vision is to become an icon of excellence and a world class of commercial

bank.

CBE`s mission is to maximize shareholders value through enhanced financial

intermediation and unparalleled customer satisfaction. The bank deploy highly
motivated, skilled and disciplined employees capable of providing banking
products and services that means international best practices and standards.

The bank strongly believes that reliability and public confidences are the basis of
our success.

CBE`s values are standing for quality and a learning organization. It is committed
to unparalleled customer satisfaction and the employees are the banks valuable
assets. The bank also committed to maximize shareholders value and upholding
transparency, Accountability and professionalism. The bank has an equal
opportunity employer and corporate citizen.
 3.1.2 Accounting policy of CBE

The following are the major accounting policies adopted by the bank. These
policies are consistent with those applied in the preceding year.

A. Basis of preparation

I. These financial statements have been prepared in compliance with international

financial reporting standards. They are prepared under the historical cost
convention.

II. All amounts in the financial statements are expressed in term of Birr.

B. Consolidation principles

I. Subsidiary:-
Subsidiaries are enterprise controlled by the bank. Control exists when the bank
has the power, directly or indirectly, to govern the financial and operating policies
of an enterprise so as to obtain economic benefits and operating policies of an
enterprise so as to obtain economic benefits from its activities. The financial
statements of subsidiaries are included in the consolidated financial statements of
subsidiaries are included in the consolidated financial statements from date control
commences until the date control ceases.
The consolidated financial statements incorporate financial statements of the bank
and its subsidiary for the year ended 30june 2009.
The subsidiary is shown in note 10.
All intercompany balances and transactions are eliminated on consolidation.

II. Associates
Associates are enterprises in which the bank has significant influence, and are
neither subsidiaries nor joint venture. The bank`s investment in associates is
accounted for in the
Consolidated financial statements using the equity method. The bank`s associates
are shown in note 11.

C. Valuation of assets and liabilities

1. Assets and liabilities denominated in foreign currencies are translated in to birr
at the
 exchange rates ruling at the balance sheet date.
2. All major financial assets are measured at fair value.
3. Impairment losses on loans and advances.
Loans and advances are shown at the gross amount adjusted for any
provision for impairment losses. A provision for loan impairment is
established if there is objective evidence that bank will not be able to collect
all amounts due according to the original contractual terms of the loan. The
amount of the provision is the difference b/n the carrying amount and the
estimated recoverable amount.
In addition, a general provision is made based on management’s assessment
of the inherent risk in the loan and advances portfolio. When a loan is
deemed uncollectable, it is written off against the related provision for
impairment. Subsequent recoveries are created to the provision for loan
losses in the income statement.

1. Property and equipment

Buildings, fixtures, fittings and office equipment, motor vehicles, computers,

accessories and software are stated at cost less accumulated depreciation and
impairment losses…

Depreciation is charged on a straight-line basis over the estimated useful lives of

the assets.
Buildings…………………………………………………………………….5%
Fixtures, fittings and office equipment……………………….10%
Motor vehicles…………………………………………………..……..20%
Computers and accessories……………………………………….10%
Computer software…………………………………………………..20%
Gains and losses on disposal of property and equipment are determined by
comparing the proceeds on disposal and the carrying amount of the
respective item and are taken in to account in determining operating profit.
5. Stocks: - Stocks are stated at cost less any provision for impairment.
 D. Recognition of financial assets and financial liabilities
The bank recognizes a financial liability on its balance sheet when, and only when,
the control over the contractual rights is lost. A financial liability is derecognized
when, and only when, it is extinguished.

E. Income recognition
Income is recognized in the period in which it is earned. When a lending account
becomes non-performing, Interest is suspended and exclude from income until it is
received. However, it is computed and shown in the memorandum account.

F. deferred income tax

eferred tax is provided, using the balance sheet liability method for all temporary
differences arising b/n the tax bases of assets and liabilities and their carrying
values for financial reporting purposes. Currently enacted tax rates are used to
determine deferred income tax.

G. Employee benefits
Bank employees are eligible for retirement benefits defined contribution plan.
Contributions to the defined contribution plan are charged to the income statement
as incurred.

H. trust funds
The bank and its subsidiary act as trustees and in other fiduciary capacities that
result I the holding or placing of assets on behalf of individuals, trusts, retirement
benefit plans and other institutions.
Assets held in trust are not included in the balance sheet of the bank and its
subsidiary.

bbreviations
CBE stands for commercial bank of Ethiopia while CN stands for commercial
nominee`s private limited company.

In this modern business world, any business entity should have a good financial
performance to sustain. Otherwise the entity is obliged to get out of the market.
Therefore, the management of the company should have adequate knowledge
about the financial performance of the company. If the company is performance
well or have a good financial performance the management should propose how to
maintain this strength .on the other hand ‚ if the company has weak financial
performance, what expected from the management is to make a good informed
decision to improve the company. The management should propose how to
maintain the strength of the company.
Management of the firm would be interested in every aspect of the financial
analysis and uses ratio analysis to evaluate the firm`s financial strength or
weakness and accordingly takes action to improve the firm`s position. Financial
analysis is the process of identifying the financial strength and weakness of the
firm by properly establishing relationship between the items of the balance sheet
and the income statement account. Financial statement analysis involves a
comparison of the firm`s performance with that of other firms in the same industry
and an evaluation of trends in the firm`s position over past time. The later one is
the easiest way to evaluate the performance of a firm. So, we considered it as a
base of conducting research.
Generally, the assessment of the financial performance by using ratio analysis will
greatly help in making product decision to different operational strategic planning.

At the end of this paper, the following questions were addressed:-

 Is commercial Bank`s financial performance has improved, deteriorated or
remain constant over the last 3 years. If there is a change, what is the reason
for this change?
 How is the liquidity of commercial bank
 Is commercial bank generating adequate interest income to cover its
expenses and earn a profit?
 How commercial bank managers utilities its total assets to generate revenue?
 To what extant does commercial bank use borrowed funds to finance the
company?
 1.1Objectives of the study
The general objective of this research is to assess the financial performance of the
company by using different financial tools and to provide the possible suggestion
based on it.
The specific objectives are the following:-
- To assess the ability of commercial bank to meet its obligation in the short
run.
- To examine the extent to which commercial bank use borrowed funds to
finance the company.
- To assess whether or not the bank is generating adequate interest income to
cover its expenses and earn a profit.
- To examine how commercial bank manages utilize its total assets to generate
revenue.

1.2 Significance of the study

Since financial statements of the firm contain important information. The data
included in the financial statement have a great economic consequence to its users.
Because of the only financial statement data are incomplete to understand the
whole aspect of the business. Financial statement analysis is important to make
good financial decision.

In specific term the significance of this paper includes:-

- To make the bank managers to improve the use of financial statement.

- To help future research related to financial analysis by providing input.

- To relate financial analysis theory and concept to the practical world their
by the
Researchers gain knowledge.

-Assist the management section by letting the know-how for how they are
financially performing and help them to take corrective action on their poor
performance and enable them to strength good performance and qualities.

1.6 Scope and limitation

The research conducted in this paper was limited only to commercial bank
financial analysis which covers the last three years, Because of time, Money and
other constraint. This research was limited to time series analysis rather than cross
sectional analysis.

1.7 Organization of the study

The study was organized in four chapters. The first chapter deals with the
introduction including background of the study, Statement of the problem,
objectives of the study, significance of the study, methodology of the study,
research design, data collection method, scope and limitation and organization of
the study. The second chapter is about literature review and third chapter deals
with data analysis and interpretation. Finally, chapter four present Conclusion and
recommendation.
 Chapter two
Literature review
2.1 Overview of the financial statements

The economic events and activities that affect a company and that can be translated
in the accounting numbers are reflected in the company’s financial statement.
Some financial statement provides a picture of the company at a moment in time.
Other describe that took place over time. Both provide a basis for evaluations what
happened. For example what rate of growth can be expected next year? There
trends provide insights in to a market acceptance, Profit & liquidity. Consequently,
a company financial statements can be used for various purposes such as analytical
tool, as a management report card, as an early warning signal, as a basis for
prediction and as a measure of accountability.(IM pandey: Financial management.
Page 65)

2.1.1 Demand for company`s financial statement

Company`s financial statements are demanded by several groups. These are:
Share holders and investors: - share holders and investors including investment
advisory use financial information to help decide on portfolio of security that
meets for their preference for risk. Return, dividend, yield & liquidity.

Managers and employees: although managers make operating and financial

decision based on information that is much more operating and financial decision
based on information that is match more detailed and timely than information
found in the financial statement. They also need and their fore demanded financial
statement data.

Their demand arises from contracts (such as, executive compensation agreement)
that are linked to financial statement variables. Executive compensation contract
frequently contain annual bonus and long term pay components tied to financial
statement result. On the other hand because of the increasing popularity employees
profit sharing and employees profit sharing and employees stock ownership to
monitor the heath of company`s sponsored pension plans and to gauge the like
hood that promised benefits will be provide up on retirement.
Lenders and suppliers:- financial statements play several roles, the relationship
between the company and lenders, who supply capital-commercial lender (banks,
insurances company and pension fund) use financial information to help decide the
loan amount contractual provision the borrower to maintain a minimum level of
working capital interest coverage or other key accounting variables that provide a
safety-net to the lender. On the other hand supplier demanded financial statement
for many reason before extending credit suppliers assess the financial strength of
their customer in order to demand to determine whether they will be paid good
shipped.
Customers: - Repeated purchase and product guarantees create continuing
relationship between company and its customers. A buyer needs if its supplier has
the financial strength to deliver a high quality product on agreed schedule and if
supplier will be able to provide technical support after the sale. Thus financial
statement information can help current potential customer monitor supplier`s
financial health and thus decide whether to purchase that suppliers good and
services.
Government and regulatory agency: demanded financial statement information for
Various purposes:-
=› A basis for establishing tax policy.
=› Government agency often a customer of business.
=› Used to regulate business especially public utilities. (BRIGHAM
Haustone: financial
Management. Page 36)

2.1.2 Types of financial statements

Balance sheet: - A balance sheet (or statement of financial position) presents the
financial position of a business enterprise on a specific data. It also describe as a
photograph of company`s business at a moment in time. There are three elements
of balance sheet these are:-
Asset: - are probable for economic benefit obtained or controlled by a
particular entity as
a result f post transactions or events.
Liabilities: - are probable future sacrifices of economic benefits arising from
present or
 Provide services to other entities in the future as a result of past transaction
or events.
=›Equity:- is the residual interest in the assets of an entity that remains after
deducting its
liabilities in a business enterprise. The equity is the ownership interest.
There are three particularly important things to keep in mind when examining a
balance sheet.
 Liquidity፡- refers to the speed and ease with an asset can be converted into
cash./Ross/
 Debt Vs equity፡- to the extent that a firm borrows money. It usually gives
claim to the firm’s cash flow to creditors. Equity holders are 0nly entitled to
the residual value the portion left after creditors are paid. The value of these
residual portions is the shareholder equity holders are only entitled to the
residual value the portion left after creditor are paid . The value these
residual portion is the shareholder equity in the firm which is just the value
of the firms asset less value of firms liability.
 Market value Vs book value: - the value shows on the balance sheet for the
firm’s asset are book value and generally are not what the asset is actually
worth. Under generally accepted accounting principle (GAAP) audited
financial statement shows asset at historical cost.
 Income Statement: - The income statement measure performance over
some period of time. usually quarter or year the income statement equation
is
Income =Revenue- Expenses

If you think of the balance sheet as snapshoot ,that you can think of the income
stamen as a video recording covering the period between a before and an after
picture.

The first thing reported on the income statement would usually be revenue and
expense from the firm’s principal operation. Subsequent part includes among other
things financial expenses such as interest paid are exported separately and the last
item is net income. Net income often expressed on per-share basis and called
earning per- share.
 Statement of cash flows; - the balance sheet shows firms investment (asset)
and structure (liability and stock holder equity) at given point in time. By
contrasting a statement of cash flows shows the users. Why firm`s
investment and financial structure have changed between balance sheet data.
Thus cash flows statement which provides an explanation of why firm`s cash
position what between successive balance sheet data. Simultaneously
explain the changes that have been taken place in the firm Non cash asset.
Liability and stock holder equity account over the same time period. The
cash flow statement summarizes the cash flows and out flow of company
broken drowns in its three principal activities.
A. Operating activities ፡- cash flow from operating activities resulting from
the cash effect of transaction and events that affect operating income both
production and delivery of goods and services.
B. investing activities :- cash flow from investing activities include making
and collecting loans investing and disposing of debt or equity securities of
other companies and purchasing and disposing of asset like equipment that
are used by company in the production of goods and services.
C. Financing activities ፡- cash flows financing activities include obtaining
cash from new insurance of stock or bonds paying amounts borrowing
money and repaying amounts borrowed. Statement of cash flows provides
information not available from other financial statement. It indicates how it
is possible for a company to report net loss and still making a large capital
expenditure or pay dividend. It can also tell whether the company issued or
retired debt or common stock or both during the period.
Note of the financial statement: - information which can be significantly
affect firms financial condition is often contained in the notes to the
financial statement. These notes contain information and on the firms
pension plan. On its Non-capitalized lease agreement on its recent a question
and divestitures on its accounting policies and so forth. (Chandra:
Fundamental of financial management, page 35)
2.3 Financial analysis definition
Financial reports covers both on firm position at point in time and its
operation over some post period. However, the real value of financial
statement lies in the fact that can be used to help prediction the firm’s future
earnings and dividend. From an investor point of view predicting future is
 what financial statements analysis all about and from a management stand
point financial statement analysis is useful both as a way to anticipate future
condition and more important as a starting point for planning action that will
influence the future course of event.

2.3.1 Purpose of financial statement analysis

1. Financial statement analysis is information processing system designed to
provide data for decision maker. The information is basically derived from
published financial statement but in the process of analysis use is also made
of non accounting data such as stock price and aggregate economic
indicator. Users of financial statement information system are decision
makers concerned with evaluating the economic situation of the firm and
predicting its future course. Given the various use and motive it is obvious
that no single information system will satisfy the requirement. (IM pandey:
Financial management. Page 25)
2.
2.3.2 Users of financial analysis
Financial analysis can be undertaken by management of the firm. Or by
parties outside the firm: - owners, creditors, investor and others. The nature
of the analysis will differ depending of the purpose of the analysis.
 Creditors: - are interested in firm`s ability to meet their clams over a
very short period.
 Suppliers of long term debt: - are concerned with the firm’s long
term solvency and survival. They analyze the firm`s profitability
overtime, its ability to generate cash to be able to pay interest and
repay principal the relationship between various sources of funds.
 Investors:-investors who have invested their money in the firm`s
shares. Are most concerned about the firm’s earnings.
3. Management of the firm:-would be interested in every aspect of the
financial analyst. It is their overall responsibility to see that the resources of
the firm are used most effectively and efficiently and that the firm`s
financial condition is sound.( Kieso and wexgand; Intermediate
F/Accounting. 1998,page 25)
 2.4 Ratio analysis
Ratio analysis has been the major tool used in the interpretation and evaluation of
financial statement for investment decision making. Generally such an analysis
involves the breaker down of examined financial report in to a component part
(e.g. fixed and current asset) which are then- evaluated in relation to other and
exogenous standard. Ratios are indicator of firm`s deficiencies such as poor
liquidity or low profitability. Thus the negative function of ratio is significant. (IM
pandey: Financial management. Page 20)

2.4.1. Users of financial ratio analysis

To evaluate the financial condition and performance of a firm the financial analyst
needs certain yardsticks. The yardstick frequently used is a ratio or index relating
two pieces of financial data to each other. Analysis and interpretation of varies
ratio should given experienced skilled analyst a better understanding of a financial
condition and performance of the firm than they would obtain from analysis of
financial data alone.

Trend analysis is the analysis of financial ratio, which involves two types of
comparisons. First the analyst can compare & present ratio with post and expected
future ratio for the some company. The current ratio (the ratio of current assets to
current liabilities) for the year and could be compared with the current ratio for the
preceding year. When financial ratios are arrayed on a spread sheet over period of
year the analyst can study the composition of change and determine whether there
has been an improvement or deterioration in the financial condition and
performance over time.

Financial ratio also can be computed for protected statements and compared
present and post ratios. In the comparison overtime, it is best to compare not only
financial ratios but also raw figures. The second method of comparison involves
comparing the ratios of one firm’s with those of similar firms or with industry
averages at the same point in time Such as a comparison gives insight in to the
financial performance of the firm.
In order to get adequate information about a company`s performance and future
conditions we can use a number of methods. Some of this are:-
 1. Ratio analysis: - it is a powerful tool of financial analysis. A ratio is
defined as indicated quotient of two mathematical expressions.
2. Index analysis: - it supports the traditional analysis. The items in the
financial statement are expressed as an index relative to the base year.
3. Common size analysis: - it is another method of financial analysis. It
expresses the status of each item in the balance sheet as percentage of
total asset or net and each items of income statement as percentages of
total sales (net).
4. Trend analysis:-in financial analysis the direction of change over
period of year is given importance.
4. To this particular paper we will be using the most important financial
performance analysis method called ratio analysis. This will be defined in
detail as follow.( Eugene F. Bringham; fundamental of F/Management.
ed.page 40)

2.4.2 Objective of ratio analysis

The major objectives of ratio analysis is considered to be facilitation of statement
interpretation this is basically achieved by reducing the large number of financial
statement items to relatively small set of ratio such as relate the absolute value of
financial item to common basis (e.g. total asset) allowing a meaningful comparison
of financial data both overtime and across firms for a given time period however
financial ratio are not intended to provide definite answer their real value is derived
from the question they provoke. Ratios are therefore symptoms of the firms
economic condition intended to guide the analysis in his financial investigation.
(Ross Stephan A: Fundamental of corporate finance, page 41)

2.4.3 Classification of ratio analysis

There are four categories of ratio analysis. Each ratio measure a particular aspect
of the firm’s position and performance.
1. Liquidity ratio
2. Activity ratio
3. Leverage ratio
4. Profitability ratio (Ross Stephan A: Fundamental of corporate finance.
Page 48)
 2.4.3.1 Liquidity ratio
Liquidity refers to the ability of a firm to meet its obligations in the short run,
usually one year. Liquidity ratios are generally based on the relationship between
current assets (the sources for meeting short-term obligations) and current
liabilities.

The important liquidity ratios are:-

o Current ratio and
o Quick ratio
Current ratio: - the current ratio measures the ability of a firm to meet its current
liabilities-current assets converted in to cash in the operating cycle of the firm and
provide the funds needed to pay current liabilities. Apparently, the higher the
current ratio, the greater the short term solvency.
However, interesting the current ratio the composition of current assets most not be
over looked. A firm with a high proportion of current assets in the form of cash and
account receivable is more liquid than one with a high proportion of current assets
in the form of inventories even through both the firms have the some current ratio.
Current ratio current asset
Current liabilities

Quick ratio: - it establishes relationship between liquid assets and current

liabilities. It is the same as current ratio except that it excludes inventories
presumably the least liquid portion of current assets from the numerator.
The ratio concentrates on cash marketable securities in relation to current
obligations and thus portion of current assets from the numerator.
The ratio concentrates on cash marketable securities in relation to current
obligations and thus provides a more penetrating measure of liquidity than does the
current ratio. The formula to calculate the ratio is
Quick ratio current- inventory
Current liability
Quick ratio is also reflecting the firm`s ability to pay its short term obligations and
the higher the quick ratio the more liquid the firm`s position.

2.4.3.2 Efficiency (turn over) ratio:-

The objective of this ratio is to indicate various aspects of operational efficiency,
attention is focused her, on a specific asset rather than on the overall efficiency of
asset utilization measured by the profitability ratio.

Fixed asset turnover ratio: - this ratio indicates the extent to which firm is using
existing property, plant and equipment to generate revenue. Higher fixed assets
turns over ratio are supposed to effect better than average fixed asset management
and lower ratio to represent poorer management.

Fixed asset turn over sales

Fixed asset

Total asset turnover ratio: - It measure the turn over all of all the firm`s asset it
indicate how effectively firm use its total resource to generate sales and is a
summary measure influenced by each of asset management ratio. High total assets
turns over ratios are suppose to indicate successful asset management and low ratio
to indicate unsuccessful management.
Total asset turn over= sales____
Total assets
2.4.3.3 Leverage (Long- Turn solvency ratio):-

The purpose of long-term solvency ratio is to indicate the firm’s ability to meet
both the principal and interest payment on the long-term obligation as opposed to
short term liquidity ratio these measures stress the long- term financial and
operating structure of the firms.

Debt-equity ratio:-shows the relative contributions creditors and owners.

Debt- equity ratio = Debt

Equity
The numerator of this ratio consists of all liabilities. Short term as well as long-
term and the denominator consist of net worth plus preference capital. In general
the lower the debt-equity ratio, the higher the degree of protection enjoyed by the
creditors.

Debt ratio: - measures the extent to which borrowed funds support the firm`s
assets.
 Debt ratio = Debt
Asset

Time interest earned: - times interest earned is supposed to measure how easily the
firms can meet its interest obligations. Many times the interest payments are
covered by funds that are normally available to pay interest expense. The lower
ratio of times interest expense. The lower ratio of times interest the more a firm
uses debt than its typical competitor.
Time interest earned = Net operating income
Interest expense
EBITDA Coverage ratio፡-
The time interest earned ratio is useful for assessing a company`s ability to meet
interest charges on its debt. But this ratio has two short comings:-

2. Interest is not the only fixed financial charge. Compares must also reduce
debt on schedule, and many firms lease assets and thus must make lease
payment.
3. EBIT does not represent all the cash flow available to service debt, especially
if a firm has high depreciation and/or amortization charges. To account for
these deficiencies, bankers and others have developed the EBITDA coverage
ratio, defined as follow;
EBITDA coverage ratio = EBITDA + Lease payments
Interest + principal payments + lease payments

The EBITD coverage ratio is most useful for relatively short term lenders such as
banks and other relatively short term bond holder’s focus on the time interest
earned ratio (BRIGHAM and HOUSTON. Page 85)

2.4.3.4 Profitability ratio

A company should earn profit to survive and grow over a long period of time.
Profit are essential, but it would be wrong to assume that every action initiated by
management of a company should arrived at maximizing profit, irrespective of
social consequence. It is unfortunate that the world profit is looked up on as a term
of abuse since some firms always want to maximize profit at the cost off
employees, customer and society.
Except for such infrequent case, it is fact that sufficient profits must be earned to
sustain the operation of the business to be able to obtain funds from investors from
expansion and growth and to contribute towards the social overheads for the
welfare of the society. Profit is the difference between revenue and expense over
period of time and is ultimately the output of a company. It will have no future if it
falls to make sufficient profits. A manager should continuously evaluate the
efficiency of its company in terms of profit. Profitability ratios are calculated to
measure the operating efficiency of the company.

Basic Earning Power (BEO) Ratio: This ratio indicates the ability of the firm`s
assets to generate operating income: calculated by dividing earnings before interest
and tax (EBIT) by total assets.

BEP ratio= EBIT

Total assets

This ratio shows the row earning power of the firm`s assets. The influence of taxes
and leverages: and it’s useful for comparing firms with different tax situations and
different of financial leverage.

Return on Asset Ratio:- Is a measure the return on total asset after interest and tax

ROA = Net income available to common stock holder

Total asset

RETURN ON EQUITY RATIO: -Is the most important accounting ratio which
measures the return on common equity.

ROE = Net income available to common stock holder

Common Equity

2.5 limitation of ratio analysis

The ratio analysis is widely used technique to evaluate the financial position and
performance of a business.

But there are certain problems in using ratios. The analysis should be aware of
these problems. The following are some of the limitation of the ratio analysis.

1. Many large, firms operate different division indifferent industries and for
such companies it is difficult to develop a meaningful set of industry
averages. Therefore, ratio analysis is more useful for small, narrowly
focused firms than for large, multidivisional ones.
2. Most firms went to better than average, so merely attaining average
performance is not necessarily good.
3. Inflation may have badly distorted firm`s balance sheet recorded values are
often substantially different from `true` values are often substantially
different from `true` values.
4. Seasonal factors can also distort analysis.
5. Firm can employ window dressing techniques to their financial statements
look stranger.
6. Different accounting practices can distort comparisons.
7. It is difficult to generalize about whether a particular ratio is good or bad.
For example, high current ratio may indicate a strong liquidity position
which is good or bad. For example, high current ratio may indicate a strong
liquidity position which is good or excessive cash which is bad.
8. A firm may have some ration that look good and other that look bad making
if difficult to tell whether the company is on balance strong of we

2.6 Overview of the bank

2.6.1 Definition of the bank

Etymologically, however, the word `bank` is derived fro the Greek word
banque or the Italian word banco both meaning a bench referring to a bench
at which money-lenders and money changers used to display their coins and
transact business in the market place. (D.M Methane)
Bank can be defined as any organization in any or all of the various function
of banking that means collecting, transferring, paying, lending, investing,
 dealing, exchanging and servicing money and claims to money both
domestically and internationally. In its more specific sense, however the
term bank refers to an institution which accepts deposits from the public
since, however the term bank refers to an institution which accepts deposits
from the public and in turn advances loans by creating credit. (M.L.Jhingan

3.6.2 Banks financial statement

Just as any other business enterprise, Banks also are accountable and have their
account presented to the public and their clientele, in the form of stock as well as
flow of document,
Balance sheet and statement of cash flow are presented every year to the share
holders of the bank who have contributed capital in organizing the company and
other interested group.

CHAPTER THREE
CHAPTER THREE

REASERCH METHODOLOGY AND DATA ANALYSIS

3. Methodology of the study

Research Design

The research design includes descriptive, explanatory and causal method. This
research is design in descriptive method. Mainly quantitative data will be used for
the research purpose. All data are described in brief and the result is interpreted by
examining the relationship between various ratio data.

1.5.2 Data collection methods

To undertake this research both primary and secondary data are used. Secondary
data (documentary source) which covers most of the source are taken from the
annual financial statement of commercial bank and primary data to some extent are
gathered through interviews with the bank. To interpret the banks financial
performance among the various ratio analysis method trend analysis through
graphical and tabular data analysis will applied.

Basically the reliability and validity to good research depends up on the quality of
collected data. Therefore to get relevant information verified financial statement
will be used and all necessary precaution will be taken. So as to ensure genuine
information is obtained.

3.2 Data analysis

As explained in chapter one the general objective of this papers it to evaluate the
financial performance of commercial bank of Ethiopia. This topic discloses data
analysis for the past three consecutive years to evaluate the performance, mean
year 2007, 2008 and 2009 G.C

3.2.1 Income analysis

 Absolute percentage
Item 2007 2008 2009 2007/08 2008/9 20070 2008/0
8 9
Interest 1,036,505,0 1,541,154,0 2,357,879,1 50464898 816,725,0 48.68 52.99
income 89 77 67 8 90
from
loan
and
advanc
e
0ther 1,225.281,4 1,430,306,1 1,301,764,5 205,024,6 71,458,37 16.7 4.99
income 56 37 05 81 1
otal 2,261,786,5 2,971,460,2 3,859,643,6 709,673,8 888,183,4 31.38 29.89
45 14 75 69 61

As indicated the above table, the aggregate income of the bank increase
continuously. In 2007, 2008 and 2009 the bank earned an aggregate income of
2,261,786,545: 2,971,460,214 and 3,859,643,675 respectively.

In 2008 and 2009 the registering an increase of 31.38 and 29.89 respectively when
compared with the result achieved to that of the preceding years.

Income from interest on loans and advances for 2008 and 2009 showed a
significance growth when compared with that of the preceding year. This account
also counted for more than half of the preceding year. This account also counted
for more than half of the total for each year.
 3.2.2 Expense analysis

Change in (000.000)

Absolute percentage
Item 2007 2008 2009 2007/08 2008/9
20070 2008/0
8 9
Interest 350,965,73 533,886,48 614,089,05 182,920,72 80,202,59 52 15
expense 3 2 7 9 5
Impairme
nt losses 2,503,097 11,792,111 7,882,683 3,285,014 3,909,428 38.7 33.15
on loans
and
advance
sundry
debtors

Acquire
d
propert
y

Other 729,162,418 556,058,277 517, 846,870 173,104,14 38,011,407 23.7 6.9

expens 1 4
total 1,088,831,24 1,101,736,85 1,139,618,81 359,313,88 122,523,43 33 11.1
8 0 0 4 0 2

As shown in the above the aggregate expense in 2008 and 2009 financial year
reached birr 1,101.74 million and birr 1, 139, 6 million respectively.

They exceeded those of the preceding financial year figure by 33% and 11.12%
respectively. During 2009, interest expense has increased by birr 80 million or
15% over the preceding year due, to substantial growth of saving deposits during
the financial year.
 Generally the aggregate expense for the last three years has been increased due to
an increment of varies expense such as annual saving deposit and other expenses.

3.2.3 Deposit analysis

Absolute percentage
Type
of 2007 2008 2009 2007/08 2007/09 2007 2008/
deposi 08 09
ts
Dema 32,
nd 810,997,657 36,527,796, 42,317,842, 3,716,798,5 5,789,846,5 11.33 15.85
deposi 190 690 40 00
t
Savin
g 189,639,718 478,830,674 1,171,767,8 289,150,95 692,937,17 152.4 144.7
deposi 48 6 4 9
ts
Total 33,ooo,837, 37,006,626. 43,489,410. 4,005,989.5 6,482,783,6 12.4 17.52
037 86 54 74

As shown in the above table the total deposit mobilized by the bank has been
increased continuously. In 2008 and 2009 financial year the total deposit of the
bank was 57,006.63 million and 43,489,410.54 and registering an increase of 12.47
and 17.52% respectively when compared to with the preceding years.

The overall increase is total deposits was result of the opening of additional
branches, the improvements made customer service and ensuring growing
confidence of the public.

3.2.4 Ratio analysis

As explained in chapter two ratio analyses is one of the major tools used in the
interpretation and evaluation of financial statement data. In this topic the various
types the values types of ratio analysis is used to interpreter and evaluate the
commercial banks financial statement and evaluate the financial performance in
the last years.

1. liquidity ratio

Liquidity ratio measure the ability of the firm to meet its current obligation. The
important liquidity ratios are current and quick ratio. Since the banks have no
inventory item within their financial statement. We can use either of the ratios to
evaluate the performance of the bank.
 Current ratio
This ratio measures the ability of commercial bank to meet it current obligations.

- Current liability is paid by using its current asset

Current ratio = Current asset

Current liability
2007= 40,883,614,330 =1.044
39,162,165,584
2008= 47,484,588,540 =1.037
45,774,568,035
2009= 55,713,623,060 = 1.025
54,356,916,741

In the post three years the banks current ratio was greater than 1. It indicate that the
bank have more than 1 birr for each birr in current liabilities covered at least equal
time over. As a result the banks have the ability to cover the claims of short term
creditors.

In the above current ratio indicates in 2007 commercial bank of Ethiopia has birr
1.044 in current asset available for every one birr in current liability in 2008 and
2009 the ratio continuously declined to 1.037 and 1.025 respectively. Since the
banks current ratio are still moderate the current assets of the bank are sufficient to
pay its current liability.
 2. Activity ratio

Activity ratios are employed to evaluate the efficiency with which the firm
manages and utilized its assets for this analysis purpose we use fixed asset turnover
ratio.

 Fixed asset turnover ratio (FACTOR)

This ratio indicates the extent to which firm is using existing property, plant and
equipment to generate revenue.
FATOR = Revenue
Fixed asset

2007 = 2,261,786,545 = 9.39

240,700,945
2008 = 2,971,460,214 = 9.94
312,052,222
2009= 3,859,644,037 = 9.87 -22-
391,011,620
In the above shown the bank’s ability in using its existing property, plant and
equipment to generate revenue in the last three years were presented. In 2007 the
banks uses its fixed asset 9.39 times generating the annual revenue of
2,261,786,545 and 9.87 for revenue 2,971,460,214 in 2008 and 3,859,644,037 in
2009 respectively.
 Total asset turnover ratio(TATOR)

At it has been indicated in the literature review this ratio indicates how effectively
firm use its total resource to generate revenue.

TATOR = Revenue

Total asset

2007 = 2,261,786,545 = 0.052

43,388,923,983
2008 = 2,971,460,214 = 0.059
50,343,473,671

2009 = 3,859,644,037 = 0.065

 59,411,719,247
In 2007 the bank total resource turns in average 0.052 times to generate revenue of
2,261,786,545 in year while in 2008 and 2009 the total asset turns 0.059 and 0.065
times annually to generate revenue of 2,971,460,214 and 3,859,644,037
respectively. The total asset turnover ratio of the bank has been increased from
2007 to 2009. This is a clear indication of the bank`s efficiency in using its total
asset in relative to revenue.
3. Leverage ratio
As discussed in the literature review the purpose of leverage ratio is indicate the
firm`s ability to meet both the principal and interest payment on the long term
obligation.
For this analysis purpose we use debt ratio of financial leverage and time interest
earned ratio of coverage ratio.
 Debt management ratio
This ratio measures the extent to which borrowed found support the firm assets.
Debt ratio = Total debt
Total asset
2007 = 39,162,165,584 = 0.90
43,388,923,983
2008 = 45,774,568,035 = 0.901
50,343,473,671
2009 = 54,356,916,741 = 0.91
59,411,719,247
In 2007 the total capital financed by the creditors was 90%.1 and 91% in 2008 and
2009 respectively.
The debt ratios of the bank have been increased from 2007 to 2009. But it is a
small difference. This implies that firm`s assets are provided by creditors relative
to owners.

As a result tie firm may face some difficulty in raising additional debt and further
creditors may require a higher rate of return (interest rate) for taking higher risk.

 Time interest earned ratio

Time interest earned ratio is intended to measures how easily the firm can meet its
interest obligation.
 TIE ratio = EBT
Interest
2007 = 1,524,121,030 = 4.3
350,965,733

2008 = 2,403,609,826 = 4.5

533, 886, 462
2009 = 3,334,114,484 = 5.4
614,089,057

The above ratio indicates the ability of the bank to meet its annual interest charge.
in each year the bank’s ability to meet its annual interest charge increased by
relatively high margin of safety. In 2007, 2008 and 2009 the banks margin safety
was 4.3, 4.5 and 5.4 respectively.

Generally as the above ratio shows the bank can raise additional burrowing in the
future without any difficulty since it assures its future strong position.

4. profitability ratio
These ratios are used to measure the management effectiveness. In describes the
firms past profitability. Even if there is little evidence that past profitability will
indicate the future prospect, this ratio is very important in evaluating performance.
For this analysis purpose we use basic earning power ratio and turn on asset.
 Basic earning power ratio
This ratio indicates the ability of commercial bank of Ethiopia asset to generate
income before fax and leverage.
BEP ratio= EBIT
Total asset
2007 = 1,524,121,035 = 0.035
43,388,923,983
2008 = 2403,609,826 = 0.048
50,343,473,671
2009 = 3,334,114,484 = 0.056
59, 411,719,247
The banks BEP ratios were 3.5% 4.8% and 5.6% for the last three consecutive
years respectively. They are reflection of the bank’s total asset power in generating
annual revenue in percentage. The ratio is the above indicate the BEP ratios of
CBE have been increased from 2007 to 2009. The growth from 2007 to 2008 and
2008 to 2009 was increased relatively in high percentage.

 Return on asset (ROA)

This ratio measures the return on total asset after interest and tax
ROA = Net income
Total asset
2007 =866,565,301 = 0.020 -25-
43,388,923,983
2008 = 1,362,564,354 = 0.027
50,343,473,671
2009 = 1,924,235,824 = 0.032
59,411,719,247
As shown from the above in each consecutive year the ratio is ranged from 2% to
3.2%. in 2007 it was 2% and 2.7% and 3.2% in 2008 and 2008 and 2009
respectively.
These ROA is increased from 2007 to 2009. This reflects the bank is utilizing its
total assets effectively in the process of generating revenue.

CHAPTER FOUR

4. Cost And Time Plan

 4.1 Time Schedule

2010/2018

No Activity April May June

1 Topic Selection x
2 Collection of useful material
x
3 Data Collection x x

4 Preparation of proposal x

4.2 Financial Budget

 Item Quantity Per unit (Birr) Total Cost (Birr)

Paper 1 100.00 100.00

Equipment and

Pens 3 6.00 18.00

stationary

Pencil 1 1.50 1.50

Binder 1 20.00 20.00

Total Cost - - 139.50

Transportation 20 trips 10.00 200.00

Total cost - - 200.00

Personal cost

Contingency - - 500.00

Overall total cost - - 839.50