This study emphasizes comparing ratio analysis of three financial concerns through evaluating their financials. Ratio analysis is a vital tool for for investors, lenders and other financial institutions to develop an understanding of profitability and financial position of an organization. Even though Ratio analyses is always criticized for meagerness of its results due to doubtful financial figures reported in financial statements (financial redressing) and not considering several intangible, non-financial aspects, but still it is of huge importance for almost all stakeholders of an organization. It has been advised that Bank Alfalah and NBP could cut-off unneeded expenses so as to extend the profits, re-assess assets and will place controls over retention of reserves, un-appropriated profits and surplus on reassessment of assets to beat the case. Bank Alfalah can also use the similar ways to override the problems. NBP’s performance remained satisfactory.
Analysis shows different findings of three banks, as you can see that UBL have had highest profits in revenues the values of UBL continued to increase. Bank Alfalah profits increased later after it started with lowest profit margin values. Bank Alfalah is in second place. And NBP had lowest net profit margin ratios. In other ratio, NBP and Bank Alfalah the values show that NBP had the highest cash flow in all three years provided. UBL had fluctuating values and a rise and fall trend was seen.
Financial institutions and other corporate organizations are curious about how their corporation is doing when compared with overall market. Economists’ wants to know which companies are financially stable and which are not as stable as they report to be. For such measures and accurate financial data Ratio analysis are conducted. They give us a clear indication of how an organization is performing in terms of financial performance. Ratio analysis is divided into several other ratios and formulae like Debt, management ratios, market value ratios, profitability analysis ratios, asset management ratios and short term solvency ratios.
All the mentioned ratios provide tools for accurate calculation of organizations financial resources, it also indicates how a corporation makes use of these resources and acquires profit. Apart from making a profit another factor to consider is how an organization is able to pay its debts as well. Debt management ratios indicates how an organization is able to pay its debts while making a profit. Studying of ratio analysis in details provide clear view of any organization’s financial climate.
The three banks selected for this study are Bank Alfalah, UBL and National Bank of Pakistan. The study will show financial position of each bank, it will indicate which bank has a stronger position among the three chosen banks. The study will also reveal how each bank pays its debts, dividends and manages their assets most effectively for profit maximizations.
Introduction to Ratio Analysis:
Ratio analysis is a financial analysis technique used to evaluate the financial performance, stability, and efficiency of a company by examining various relationships between key financial variables. It involves the calculation and interpretation of financial ratios, which provide insights into a company’s liquidity, profitability, solvency, and operational efficiency. Ratio analysis is a valuable tool for investors, creditors, management, and other stakeholders to make informed decisions about a company’s financial health.
Key Financial Ratios:
- Liquidity Ratios:
- Current Ratio: This ratio measures a company’s short-term liquidity and is calculated by dividing current assets by current liabilities. A higher current ratio indicates better liquidity.
- Quick Ratio (Acid-Test Ratio): The quick ratio is a stricter measure of liquidity, excluding inventory from current assets. It is calculated by dividing quick assets (current assets minus inventory) by current liabilities.
- Profitability Ratios:
- Gross Profit Margin: This ratio assesses a company’s profitability by measuring the percentage of sales revenue retained after deducting the cost of goods sold.
- Net Profit Margin: The net profit margin indicates the percentage of profit a company generates from its total revenue after accounting for all expenses and taxes.
- Return on Assets (ROA): ROA measures a company’s efficiency in utilizing its assets to generate profits. It is calculated by dividing net income by total assets.
- Return on Equity (ROE): ROE evaluates a company’s profitability from the perspective of its shareholders by dividing net income by shareholders’ equity.
- Solvency Ratios:
- Debt-to-Equity Ratio: This ratio assesses a company’s leverage by comparing its total debt to shareholders’ equity. A higher ratio may indicate higher financial risk.
- Interest Coverage Ratio: The interest coverage ratio measures a company’s ability to meet its interest obligations by dividing earnings before interest and taxes (EBIT) by interest expenses.
- Efficiency Ratios:
- Inventory Turnover Ratio: This ratio evaluates how efficiently a company manages its inventory by dividing the cost of goods sold by average inventory.
- Accounts Receivable Turnover Ratio: This ratio assesses how effectively a company collects its accounts receivable by dividing net credit sales by average accounts receivable.
- Market Ratios:
- Price-to-Earnings (P/E) Ratio: The P/E ratio compares a company’s stock price to its earnings per share (EPS), providing insights into its valuation and market expectations.
- Price-to-Book (P/B) Ratio: The P/B ratio compares a company’s market value to its book value (shareholders’ equity), indicating whether the stock is undervalued or overvalued.
Interpretation of Ratios:
The interpretation of financial ratios depends on the industry, company size, and specific financial goals. Generally, a ratio analysis involves the following considerations:
- Bench marking: Comparing a company’s ratios to industry averages or competitors’ ratios helps identify areas of strength or weakness.
- Trends: Analyzing ratios over time reveals trends and indicates whether a company’s financial performance is improving or deteriorating.
- Absolute Values: Some ratios have specific thresholds that indicate financial health. For example, a current ratio below 1 suggests potential liquidity issues.
- Qualitative Factors: Ratio analysis should be complemented with qualitative analysis, considering factors such as economic conditions, industry trends, and management decisions.
Limitations of Ratio Analysis:
While ratio analysis is a valuable tool, it has limitations:
- Benchmarking Challenges: Finding suitable benchmarks can be challenging, as industries vary significantly.
- Timing Issues: Ratios reflect past performance and may not predict future outcomes accurately.
- Accounting Methods: Differences in accounting methods can affect ratios, making comparisons between companies challenging.
- Lack of Context: Ratios provide numbers but not the context behind them. Qualitative analysis is essential for a complete understanding.
Conclusion:
Ratio analysis is a powerful tool for evaluating a company’s financial performance and making informed decisions. By examining liquidity, profitability, solvency, and efficiency, stakeholders can gain valuable insights into a company’s financial health and use this information for investment, lending, and management purposes. However, it’s essential to recognize the limitations and conduct a holistic analysis that considers both quantitative and qualitative factors. Ratio analysis is a fundamental skill for financial professionals and investors seeking to understand and assess the financial stability and viability of businesses.
