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Final Project

Date: 21,dec.09

Course:

Financial Management

Submitted to:

Sir Taqi Zaidi

Submitted By:

Sidra Anjum 066Arusa Sarwar F06-014Farah Munawar 020Hissam Mehmood 028Haroon Abbas 022Umair Saeed 048

Management SciencesComsats Institute of Information and Technology

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Final Project

FINANCIAL STATEMENT ANALYSIS OF

BANK AL FALAH

Dedication

We would like to dedicate this project to Sir Umair Saeed and Sir Taqi Zaidi who have

always encourage us throughout in our semester.

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Executive Summary

The primary objective of financial analysis is to forecast or determine the actual financial

status and performance of a project. The Organization is chosen, from the banking sector.

So we have taken BANK ALFALAH LTD, their annual reports of years 2006, 2007,

2008 for Ratio analysis.

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.

Common ratios which is used for analysis of Bank:

a) Liquidity Ratios

b) Leverage Ratios

c) Profitability Ratios

d) Asset Management Ratios

e) Market Ratios

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1) Introduction of the project.. 5

a) Companys Introduction ... 6

b) Objectives . 7

c) Significance 7

2) Ratio Analysis 8

a) Liquid Ratio 9

b) Leverage Ratio 10

c) Profitability Ratio 11

d) Asset Management Ratio.... 13

e) Market Ratios 14

3) Trend Analysis... 16

4) Recommendation 17

5) Financial Reports

a) Balance Sheet-2008-2007.. 18

b) Profit/Loss Account-2008-2007 19

c) Cash Flow Statement-2008-2007. 20

d) Balance Sheet-2006. 21

e) Profit/Loss Account-2006 22

f) Cash Flow Statement-2006.. 23

6) Bibliography... 24

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Introduction of Project:

Financial Statement Analysis is a method used by interested parties such as investors,

creditors, and management to evaluate the past, current, and projected conditions and

performance of the firm.

Ratio analysis is the most common form of financial analysis. It provides relative

measures of the firm's conditions and performance. Financial ratio analysis is an

important topic and is covered in all mainstream corporate finance textbooks.

It is widely used to summarize the information in a company's financial statements in

assessing its financial health. In today's information technology world, real time financial

data are readily available via the Internet.

In the current scenario where financial instability is rife and financial intuitions are

becoming popular, when it comes to investing, the sound analysis of financial statements

is one of the most important elements in the fundamental analysis process.

However, through financial ratio analysis, we shall be able to work with numbers in an

organized fashion and present them in a concise form easily understandable to both the

management and interested investors.

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Introduction of Bank Al-Falah:

Bank Alfalah Limited is a private bank in Pakistan owned by the Abu Dhabi Group.

Bank Alfalah Limited was incorporated on June 21st, 1992 as a public limited company

under the Companies Ordinance 1984. Its banking operations commenced from

November 1st, 1997. The bank is engaged in commercial banking and related services as

defined in the Banking companies ordinance, 1962. The Bank is currently operating

through 195 branches in 74 cities.

Bank Al-Falah is known to perceive the requirements of customers and match them with

quality products and service solutions. During the past five years, this bank has emerged

as one of the foremost financial institution in the region endeavoring to meet the needs of

tomorrow today.

Bank Al-Falah is one of the most important entities in banking sector of Pakistan with a

strong credit rating of AA for long term and A one plus for the short term. Since its

inception, as the new identity of H.C.E.B after the privatization in 1997, the management

of the bank has implemented strategies and policies to carve a distinct position for the

bank in the market place.

Strengthened with the banking of the Abu Dhabi Group and driven by the strategic goals

set out by its board of management, the Bank has invested in revolutionary technology to

have an extensive range of products and services.

Vision:

To be the premier organization operating locally & internationality that provides the

complete range of financial services to all segments under one roof

Mission:

To develop & deliver the most innovative products, manage customer experience,

deliver quality services that contributes to brand strength, establishes a competitive

advantage and enhances profitability, thus providing value to the stakeholders of thebank

http://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/w/index.php?title=Abu_Dhabi_Group&action=edit&redlink=1http://en.wikipedia.org/wiki/Pakistanhttp://en.wikipedia.org/w/index.php?title=Abu_Dhabi_Group&action=edit&redlink=1

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Objectives:

The objective of this project is to provide insight into how the bank works, what are the

strengths and weakness of the bank. The objective of financial analysis is to forecast

and/or determine the actual financial status and performance of a bank.

We worked on the financial statements of the bank i.e. Balance sheet of the bank and

make some essential calculations in order to give you an idea about the financial stability

of the bank.

Significance:

Financial statements provide an overview of a business' financial condition in both short

and long term. In assessing the significance of various financial data, experts engage in

ratio analyses, the process of determining and evaluating financial ratios. A financial ratio

is a relationship that indicates something about a company's activities, such as the ratio

between the company's current assets, current liabilities or between its accounts

receivable and its annual sales. The basic source for these ratios is the company's

financial statements that contain figures on assets, liabilities, profits, or losses. Financial

ratios are only meaningful when compared with other information. Since they are most

often compared with industry data, ratios help an individual understand a company's

performance relative to that of competitors; they are often used to trace performance over

time.

The goal in analyzing financial statements is to assess past performance and current

financial position and to make predictions about the future performance of a company.

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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 ofratios 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. It is defined as the systematic use of ratio to

interpret the financial statements so that the strength and weaknesses of a firm as well as

its historical performance and current financial condition can be determined.

Common ratios which are used for analysis are:

a) Liquidity Ratios

b) Leverage Ratios

c) Profitability Ratios

d) Asset Management Ratios

e) Market Ratios

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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.

Interpretation

The ratios for the last 3 years are 1.06, 1.10 & 1.06, shows below standard of 2:1 which

means efficient use of funds but at the risk of low liquidity.

.

b) Debt Management Ratios:

By using a combination of assets, debt, equity, and interest payments, leverage ratios are

used to understand a company's ability to meet it long term financial obligations.

Leverage ratios measure the degree of protection of suppliers of long term funds. The

level of leverage depends on a lot of factors such as availability of collateral, strength of

operating cash flow and tax treatments. Thus, investors should be careful about

comparing financial leverage between companies from different industries. These

include:

Year 2006 2007 2008

Current Assets 265182551 316972828 335217471

Current Liabilities 249906022 286843944 315476169

Current ratio 1.06 1.10 1.06

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Time Interest Earned:

TIE Ratio = EBIT / Interest Charges

The interest coverage ratiotells us how easily a company is able to pay interest expensesassociated 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.

Interpretation

We can see that, this company has covered their interest expenses 1.16 times in 2006,

1.27 times in 2007 and 1.08 times in 2008. It means they havent improved in the past

years.

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.

EBIT 17798831 21156515 22125914

Interest charges 15232886 16620963 20331194

TIE ratio 1.16 1.27 1.08

Year 2006 2007 2008

Total debt 263443596 312675308 331946025

Total Assets 275685541 328895152 348990764

Debt Ratio 0.95 0.95 0.95

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Interpretation:

Calculating the debt ratio, we came to see that this company is highly leveraged one.

c) Profitability Ratios:

Profitability is the net result of a number of policies and decisions. These ratios, much

like the operational performance ratios, give users a good understanding of how well the

company utilized its resources in generating profit and shareholder value. The long-term

profitability of a company is vital for both the survivability of the company as well as the

benefit received by shareholders. It is these ratios that can give insight into the all

important "profit". Profitability ratios show the combined effects of liquidity, asset

management and debt on operating results. These ratios examine the profit made by the

firm and compare these figures with the size of the firm, the assets employed by the firm

or its level of sales. There are four important profitability ratios that I am going to

analyze:

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.

Interpretation

Therefore, the Net Profit Margin was 29.07% in 2006, decrease to 19.97% in 2007 and

then again increased to 24.66% in 2008

Year 2006 2007 2008

Net Profit 1762691 3130229 1301301

Sales 21191470 25783871 31046583

Net Profit Margin 8.31% 12.1% 4%

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Return on Assets:

Return on Assets (ROA) = Profit after Taxation / Average Total assets x 100

ROA, A measure of a company'sprofitability, equal to a fiscal year'searnings 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. Simply put, if ROA is above the rate that the company borrows at

then the project should be accepted, if not then it is rejected.

Interpretation

Return on assets decreased gradually throughout the years.

Return on Equity (ROE):

Return on Total Equity = Profit after taxation

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 2006 2007 2008

Net income 1762691 3130229 1301301

Total Average assets 137966927.5 302290346.5 338942958

ROA 1.27% 1.01% 0.038%

http://www.businessdictionary.com/definition/measure.htmlhttp://www.investorwords.com/992/company.htmlhttp://www.investorwords.com/3881/profitability.htmlhttp://www.investorwords.com/1984/fiscal_year.htmlhttp://www.investorwords.com/1618/earnings.htmlhttp://www.investorwords.com/5975/total_assets.htmlhttp://www.businessdictionary.com/definition/percentage.htmlhttp://www.businessdictionary.com/definition/measure.htmlhttp://www.investorwords.com/992/company.htmlhttp://www.investorwords.com/3881/profitability.htmlhttp://www.investorwords.com/1984/fiscal_year.htmlhttp://www.investorwords.com/1618/earnings.htmlhttp://www.investorwords.com/5975/total_assets.htmlhttp://www.businessdictionary.com/definition/percentage.html

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The Return on Equity was maximum in 2007 but decreased to an extent in the following

years 2007 and 2008. This again may have happened due to the issue of more long-term

debt in 2007 and 2008.

d) Asset Management Ratios:

A set of ratios that measure how effectively a firm is managing its assets.

Fixed Assets Turnover:

This ratio is indicates that how much sales are contributed by investment in fixed Assets.

Fixed Assets Turnover = Net Sales / Fixed Assets

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 2006 2007 2008

Net income 1762691 3130229 1301301

Total Equity 10572605 13766673 14608523

ROE 16.6% 22.5% 8.9%

Year 2006 2007 2008

Net Sales 21191470 25783871 31046583

Fixed Assets 10502990 11922324 13773293

Sales to Fixed Assets 2.017 times 2.16 times 2.25 times

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e) Market Ratio:

Market Value Ratios relate an observable market value, the stock price, to book values

obtained from the firm's financial statements.

Earnings Per Share- EPS:

Earnings Per Share = Net Income

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

share's price. It is also a major component used to calculate the price-to-earnings

valuation ratio.

Price / Earnings Ratio:

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 2006 2007 2008

Total Sales 21191470 25783871 31046583Total Assets 275685541 328895152 348990764

Total Asset Turnover 0.07 0.07 0.08

Year 2006 2007 2008

Profit after Taxation 1762691 3130229 1301301

Number of Shares 500000 650000 799500

Earnings Per Share 3.525 4.815 1.627

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The P/E Ratio indicates how much investors are willing to pay per dollar of current

earnings. As such, high P/E Ratios are associated with growth stocks. (Investors who are

willing to pay a high price for a dollar of current earnings obviously expect high earnings

in the future.) In this manner, the P/E Ratio also indicates how expensive a particular

stock is. This ratio is not meaningful, however, if the firm has very little or negative

earnings.

Interpretation

The P/E ratio was 2.83 times in 2006 and decreased a little bit in 2007. However, in 2008 it

increased as much higher than before to 6.14 times.

Book Value per Share:

Book Value per Share = Shareholders Equity

Share Capital

This is defined as the Common Shareholder's Equity divided by the Shares Outstanding

at the end of the most recent fiscal quarter. It is the Indication of the net worth of the

corporation. Somewhat similar to the earnings per share, but it relates the stockholder's

equity to the number of shares outstanding, giving the shares a raw value. Comparing the

market value to the book value can indicate whether or not the stock in overvalued or

undervalued.

Year 2006 2007 2008

Stock price per share 10 10 10

EPS 3.525 4.815 1.627

Price / Earnings Ratio 2.83 2.07 6.14

Year 2006 2007 2008

Equity 10572605 13766673 14608523

Share Capital 5000000 6500000 7995000

Book Value per Share 2.11 2.11 1.82

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Trend Analysis:

A firm's present ratio is compared with its past and expected future ratios to determine

whether the company's financial condition is improving or deteriorating over time. Trend

analysis studies the financial history of a firm for comparison. By looking at the trend of

a particular ratio, one sees whether the ratio is falling, rising, or remaining relatively

constant. This helps to detect problems or observe good management.

TREND ANALYSIS

FOR THE YEARS 2006, 2007 & 2008

Performance Area 2006 2007 2008 Trend

a) Liquidity Ratios

Current Ratio1.06 1.10 1.06

Higher liquidity in

2007

b) Leverage Ratios

Time Interest Earned 1.16 1.27 1.08Lower since 2008

Debt Ratio0.95 0.95 0.95

Leverage remain

same

c) Profitability Ratios

Net Profit Margin 0.08%0.12% 0.04%

Lower profitability

during 2006

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Return on Assets 0.01277618

5

0.01035504

10.0038393 Lower ROA during

2007

d) Asset Management

Ratios:

Fixed Assets Turnover2.017 times 2.16 times 2.25 times Lower in 2006

Total Asset Turnover0.07 0.07 0.08

Higher efficiency

since 2008

e) Market Ratios:

Earning Per Share- EPS3.525 4.815 1.627 Higher In 2007

Price / Earning Ratio0.54 0.68 0.49 Lower in 2008

Book Value per Share2.11 2.11 1.82

Good market

perceptions

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Recommendations:

Bank need to improve their liquidity status

Bank al falah need to improve their financial performance in order to compete.

Bank Al falah Limited has to minimize it financial charges.

Bank need to reduce financial leverage risk.

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Financial Statements:

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Bibliography:

Internet sources

www.investopedia.com

www.bankalfalah.com

http://www.investopedia.com/http://www.investopedia.com/

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