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Advance Analysis Of Financial Statement Assignment

Financial Ratio Analysis of HABIB BANK on the basis of financial record of 2006, 2007 & 2008

WAQADS UR REHMAN REG #53135

Habib Bank
Companys introduction:
Habib Bank Limited commonly referred to as "HBL" and head-quartered in Habib Bank Plaza, Karachi, Pakistan, is the largest bank in Pakistan. HBL is a Banking Company, which is engaged in Commercial & Retail Banking and th August related services domestically and overseas. HBL was incorporated on 25 1941 and operated in the private sector until its nationalization in 1974. HBL has been approved for privatization and the privatization commission has selected a Financial Advisor to prepare a comprehensive plan and assist in the sale process. The government has appointed a professional management team to restructure the bank and to recover and clean its doubtful and classified portfolio. HBL is one of the largest commercial bank of Pakistan. It accounts for a substantial share (20%) of the total commercial banking market in Pakistan with a network of 1,705 domestic branches; 55 overseas branches in 26 countries spread over Europe, the Middle East, Far East, Asia, Africa and the United States; 3 HBL wholly owned Subsidiaries namely Habib Bank Financial Services (PVT) LTD. Karachi, Habib Finance International LTD (Hong Kong) and Habib Finance Australia Ltd. Sydney; 2 Joint Ventures namely Habib Nigeria Bank Ltd. (40%) and Himalayan Bank Ltd. (20%) and 2 representative offices in Iran and Egypt. It continues to dominate the commercial banking sector with a major market share in inward foreign remittances (55%) and loans to small industries, traders and farmers. HBL is one of Pakistan's premier banks in terms of deposits and advances with a huge domestic and international network.

RATIO ANALYSIS:
Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. Ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. Financial ratios are usually expressed as a percent or as times per period. Ratio analysis is a widely used tool of financial analysis.

a) Liquidity Ratios b) Leverage Ratios c) Profitability Ratios d) Activity Ratios e) Market Ratios

Ratio Analysis:
a)

Liquidity Ratios

Liquidity ratios measure a firms ability to meet its current obligations. These include:

Current Ratio:
Current Ratio = Current Assets / Current Liabilities
This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current assets normally include cash, marketable securities, accounts receivables, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes, and other accrued expenses. Current assets are important to businesses because they are the assets that are used to fund day-to-day operations and pay ongoing expenses. Year Current Assets Current Liabilities Current ratio 2006 575611106 480455832 1.20 2007 671597594 566659483 1.19 2008 731954693 631948038 1.16

The current ratio for the year 2006, 2007 & 2008 is 1.20, 1.19 & 1.16 respectively, compared to standard ratio 2:1 this ratio is lower which shows low short term liquidity efficiency at the same time holding less than sufficient current assets mean inefficient use of resources.

Sales to Working Capital:

Sales to Working Capital = Sales / Working Capital
Sales to working capital give an indication of the turnover in working capital per year. A low working capital indicates an unprofitable use of working capital .

Year Sales Working Capital Sales to Working

2006 43685740 95155274 0.5 times

2007 43685740 104938111 0.5 times

2008 63305033 100006655 0.6 times

This liquidity ratio for the years 2006, 2007 & 2008 is 0.5,0.5 & 0.6 times respectively, compared to standard ratio 2:1 this ratio is lower which shows low short term liquidity efficiency at the same time holding less than sufficient current assets mean inefficient use of resources.

Working Capital:
Working Capital = Current Assets Current Liabilities

Year Current Assets Current Liabilities Working Capital

2006 575611106 480455832 95155274

2007 671597594 566659483 104938111

2008 731954693 631948038 100006655

It is very clear from the above calculations that the working capital of the bank is gradually increasing over the years, which shows good short term liquidity efficiency.

b)

Leverage Ratios:

Time Interest Earned:

TIE Ratio = EBIT / Interest Charges The interest coverage ratio tells us how easily a company is able to pay interest expenses associated to the debt they currently have. The ratio is designed to understand the amount of interest due as a function of companys earnings before interest and taxes (EBIT). This ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest cost. Year EBIT Interest Charges TIE ratio 2006 32044524 13204037 2.43 2007 34298574 19153957 1.79 2008 48559935 19153957 1.83

We can see from this ratio analysis that, this company has covered their interest expenses 2.43 times in 2006, 1.79 times in 2007 and 1.8 times in 2008. It means they have performed pretty much same in 2007 and 2008, but has taken a different look in 2006. As in 2006 they issued a little high number of long-term loans and does not have good liquidity position, their EBIT became high thus making TIE a little high as well.

Debt Ratio:
Debt Ratio = Total Debt / Total Assets The ratio of total debt to total assets, generally called the debt ratio, measures the percentage of funds provided by the creditors. The proportion of a firm's total assets that are being financed with borrowed funds. The debt ratio is calculated by dividing total long-term and short-term liabilities by total assets. The higher the ratio, the more leverage the company is using and the more risk it is assuming. Assets and liabilities are found on a company's balance sheet.

Year Total debt Total Assets Debt Ratio

2006 536848102 590291468 0.91

2007 628754092 691991521 0.91

2008 682747953 757928,89 0.9

Debt to Equity Ratio:

Debt to Equity Ratio = Total debt / Total Equity The debt to equity ratio is the most popular leverage ratio and it provides detail around the amount of leverage that a company has in relation to the shareholders. As you can see through the formula below, the lower the number, the less leverage that a company is using. The debt to equity ratio gives the proportion of company assets that are financed by debt equity. As a result, debt to equity calculations often only includes long-term debt rather than a company's total liabilities.

Year Total debt Total Equity Debt To Equity Ratio

2006 536848102 45177664 11.88

2007 628754092 55063125 11.42

2008 682747953 71280902 9.58

We can see from the above calculations that this ratios continuously decreasing in the last three years.

Current Worth / Net worth Ratio:

Current Worth to Net worth Ratio= Current Worth / Net worth Ratio We can calculate current worth and net worth by using following formulas: Current Worth = Total Current Assets Total Current Liabilities Net Worth = Total Assets - Total Liabilities

Year Current Worth Net Worth Current Worth to Net

2006 95155274 53443366 1.78

2007 104938111 63237429 1.66

2008 100006655 75180436 1.33

We can see from the above calculations that this ratios continuously decreasing in the last three years. In 2006 it was 1.78, in 2007 it was 1.66 and in 2008 it was 1.33.

Total Capitalization Ratio:

Total Capitalization Ratio = Long-term debt / long-term debt + shareholders' equity The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth. Long-term debt is divided by the sum of long-term debt and shareholders' equity. This ratio is considered to be one of the more meaningful of the "debt" ratios - it delivers the key insight into a company's use of leverage.

Year Long Term debt Long term debt + Equity Capitalization Ratio

2006 56392270 101569934 0.56

2007 62094609 117157734 0.53

2008 50799915 122080817 0.42

It is obvious from the above calculations that there is a gradual fall in this ratio over the years.

Long term Assets versus Long term Debt:

Long term Assets versus Long term Debt= Long Term Assets/ Long Term Debts Year Long Term Assets Long term debt L.T Assets /L.T Debts 2006 14680362 56392270 0.26 2007 20393927 62094609 0.33 2008 25973696 50799915 0.51

Debt Coverage Ratio:

Debt Coverage Ratio = Net Operating Income / Total Debt Year Net Operating Income Total Debt Debt Coverage Ratio 2006 12074762 536848102 0.02 2007 5121453 628754092 0.008 2008 5655568 682747953 0.0083

c) Profitability Ratios: Net Profit Margin:

Net Profit margin = Net Profit / Sales x 100 Net Profit Margin gives us the net profit that the business is earning per dollar of sales. This margin indicates the profit after all the costs have been incurred it shows that what % of turnover is represented by the net profit. An increase in the ratios indicates that a firm is producing higher net profit of sales than before. Year Net Profit Sales Net Profit Margin 2006 12700315 43685740 29.07% 2007 10084037 50481021 19.97% 2008 15614020 63305033 24.66%

Therefore, the Net Profit Margin was 8.31% in 2006, increase to 12.1% in 2007 and then decrease to 4% in 2008 Operating Income Margin: Operating Income Margin = Operating Income x 100 Net Sales

Operating Income Margin = Net mark-up / interest income after provisions + Mark-up / return / interest expensed - Total non mark-up / interest expenses

Year Operating Income Net Sales Operating Income

2006 25278799 43685740 57.9%

2007 24275410 50481021 48%

2008 37738818 63305033 59.6%

Return on Assets:
Return on Assets (ROA) = Profit after Taxation / Average Total assets x 100 ROA, A measure of Profitability, equal to a fiscal year's earnings divided by its total assets, expressed as a percentage. This is an important ratio for companies deciding whether or not to initiate a new project. The basis of this ratio is that if a company is going to start a project they expect to earn a return on it, ROA is the return they would receive. Year Net income Total Average assets ROA 2006 12700315 559592686.5 2.27% 2007 10084037 641141494.5 1.57% 2008 15614020 724959955 2.15%

Return on assets decreased in 2007 and 2008 and it was maximum in year 2006. This may have occurred because Square used more debt financing in 2006 compared to 2007 and 2008 which resulted in more interest cost and brought the Net income down.

Return on Equity (ROE):

Return on Total Equity = Profit after taxation x 10 Total Equity

Total Equity:
Return on Equity measures the amount of Net Income earned by utilizing each dollar of Total common equity. It is the most important of the Bottom line ratio. By this, we can find out how much the shareholders are going to get for their shares. This ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors.

Year Net income Total Equity ROE

2006 12700315 45177664 28.11%

2007 10084037 55063125 18.31%

2008 15614020 71280902 21.9%

The Return on Equity was maximum in 2006 but decreased in 2007 and went down more in 2008. This again may have happened due to the issue of more long-term debt in 2007 and 2008.

Operating Assets Turnover:

Operating Assets Turnover = Operating Assets x 100 Net Sales

Year Operating Assets Net Sales Operating Assets Turnover

2006 94230402 43685740 192.7%

2007 97259620 50481021 192.7%

2008 110591707 63305033 174.70%

Detail of Operating Assets of Habib Bank Limited: 2008 Operating Assets: Cash and balances with treasury banks Balances with other banks Operating fixed assets 2007 Operating Assets: Cash and balances with treasury banks Balances with other banks Operating fixed assets 55487664 27020704 13780555 97259620 56533134 39307321 14751252 110591707

2006 Operating Assets: Cash and balances with treasury banks Balances with other banks Operating fixed assets 46310478 35965048 11954876 94,230,402

Return on Operating Assets:

Return on Operating Assets = Profit after Taxation x 100 Operating assets Year Net Profit Operating Assets Return on Operating Assets 2006 12700315 94230402 13.48% 2007 10084037 97259620 10.37% 2008 15614020 110591707 11.19%

Sales to Fixed Assets:

This ratio is indicates that how much sales are contributed by investment in fixed Assets. Sales to Fixed Assets = Net Sales / Fixed Assets Year Net Sales Fixed Assets Sales to Fixed Assets 2006 43685740 11954876 3.65 times 2007 50481021 13780555 3.66 times 2008 63305033 14751252 3.66 times

d) Activity Ratios:
Activity ratio are sometimes are called efficiency ratios. Activity ratios are concerned with how efficiency the assets of the firm are managed. These ratios express relationship between level of sales and the investment in various assets inventories, receivables, fixed assets etc.

Total Asset Turnover:

Total Asset Turnover = Total Sales / Total Assets The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.

Year Total Sales Total Assets Total Asset Turnover

2006 43685740 590291468 0.07

2007 50481021 691991521 0.07

2008 63305033 757928389 0.08

The Return on Equity was maximum in 2006 but decreased in 2007 and went down more in 2008. This again may have happened due to the issue of more long-term debt in 2007 and 2008.

e) Market Ratio:
Market Value Ratios relate an observable market value, the stock price, to book values obtained from the firm's financial statements.

Dividend per Share DPS:

Dividend per Share = Total amount of Dividend Number of outstanding shares Per share capital = 10 per share Or No. of shares outstanding = share capital / 10

Year Total amount of Dividend Number of Shares Dividend per Share

2006 691350 690000 1.0019

2007 1381000 690000 2.0014

2008 2730251 759000 3.597

Earnings per Share- EPS:

Earnings per Share = Profit after Taxation Number of Shares

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. Earnings per share are generally considered to be the single most

important variable in determining a shares price. It is also a major component used to calculate the price-toearnings valuation ratio.

Year Profit after Taxation Number of Shares Earnings Per Share Price / Earnings Ratio:

2006 12700315 690000 18.41

2007 10084037 690000 14.61

2008 15614020 759000 20.57

Price / Earnings Ratio = Stock Price Per Share Earning Per Shares The Price-Earnings Ratio is calculated by dividing the current market price per share of the stock by earnings per share (EPS). (Earnings per share are calculated by dividing net income by the number of shares outstanding.)

Year Stock price per share EPS Price / Earnings Ratio

2006 10 18.41 0.54

2007 10 14.61 0.68

2008 10 20.57 0.49

Interpretation The P/E ratio was 0.54 times in 2006 and increased further to as high as 0.68 times in the following year. However, in 2008 it declined to 0.49 times which is an alarming signal for the potential investors. Dividend Payout Ratio: Dividend Payout Ratio = Dividend per Share Earnings per Share The percentage of earnings paid to shareholders in dividends. The payout ratio provides an idea of how well earnings support the dividend payments. More companies tend to have a higher payout ratio. This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders.

Year DPS EPS Dividend Payout Ratio

2006 1.0019 18.41 0.0544

2007 2.0014 14.61 0.137

2008 3.597 20.57 0.175