Financial Ratio Analysis of Bank-e-Millie Afghan 2013-2016

Faculty of Business Administration
Bachelor of Business Administration (BBA)
Monograph Title:
Financial Ratio Analysis of Bank-e-Millie Afghan
2013-2016
In partial fulfillment of the requirements for the award of the degree of
BBA (Finance)
Supervisor: Prof. Rahim Amin
Submitted By: Shabir Ahmad “Momand”
1396

I
PROJECT APPROVAL SHEET
The undersigned certify that they have read the following Project Report and are satisfied with the
overall exam performance, and recommend the project to the Department of Business Administration
for acceptance.
Title: [financial Ratio Analysis of Bank-e-Millie Afghan]
Prepared by: [Shabir Ahmad “Momand”]
[E95-1558]
Supervised by: Prof. Rahim Amin
Designation in KARWAN
Signature and Date
Project Coordinator: _________________________________
Head of Department: _________________________________
Vice Chancellor “Academic: _________________________________
KU Management Verification & Stamp: _________________________________
Date:

II
DECLARATION
I hereby, declare that the Monograph Financial Ratio Analysis of Bank-e-Millie Afghan of the
requirements for the Degree of Bachelor of Business Administration (BBA) to KARWAN
UNIVERSITY is my original work and not submitted for any other degree, diploma, fellowship
or similar title or prize.
Shabir Ahmad “Momand”
Signature: __________________
Date:

III
ACKNOWLEDGEMENT
My all praises and thanks to Almighty Allah for giving the depth of knowledge and
understanding of universe.
I deem it a proud privilege to extend my greatest sense of gratitude to my Project Guide
Prof. Rahim Amin for the keen interest, inspiring guidance, continuous encouragement,
valuable suggestions and constructive criticism throughout the pursuance of this report.
I am also grateful to the members of my committee for their patience and support in
overcoming numerous obstacles have faced through my monograph.
I would like to thanks my fellow classmates for their feedbacks, cooperation and of course
friendship.
I would like to thank my friends for accepting nothing less than excellence from me. Last but
not the least, I would like to thank my family: my parents and to my brothers for supporting
me spiritually throughout writing this thesis and the courage to deal with any obstacle of life
by increasing the capacity of my educational background.
Signature Here
Shabir Ahmad “Momand”
BBA- Finance

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Abstract
In any organization, the two important financial statements are the Balance Sheet and Profit & Loss
Account of the business. Balance Sheet is a statement of financial position of an enterprise at a
particular point of time. Profit & Loss account shows the net profit or net loss of a company for a
specified period of time. When these statements of the last few year of any organization are studied
and analyzed, significant conclusions may be arrived regarding the changes in the financial position,
the important policies followed and trends in profit and loss etc. Analysis and interpretation of
financial statement has now become an important technique of credit appraisal. The investors,
financial experts, management executives and the bankers all analyze these statements. Though the
basic technique of appraisal remains the same in all the cases but the approach and the emphasis in the
analysis vary. A banker interprets the financial statement so as to evaluate the financial soundness and
stability, the liquidity position and the profitability or the earning capacity of borrowing concern.
Analysis of financial statements is necessary because it helps in depicting the financial position on the
basis of past and current records. Analysis of financial statements helps in making the future decisions
and strategies. Therefore it is very necessary for every organization whether it is a financial or
manufacturing, to make financial statement and to analyze it.

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Table of Contents
PROJECT APPROVAL SHEET .............................................................................................................I
DECLARATION................................................................................................................................... II
ACKNOWLEDGEMENT....................................................................................................................III
ABSTRACT…………………………………………………………………………………………..IV
CHAPTER ONE.....................................................................................................................................1
BACKGROUND OF THE STUDY .......................................................................................................1
1.1 IMPORTANCE OF FINANCE: ..................................................................................................................................1
1.2 INTRODUCTION TO FINANCIAL RATIO ANALYSIS: ......................................................................................................2
1.3 MEANING AND DEFINITION .................................................................................................................................2
1.4 NATURE OF RATIO ANALYSIS:...............................................................................................................................2
1.5 USES OF RATIO ANALYSIS:...................................................................................................................................3
1.6 A) MANAGERIAL USES OF RATIO ANALYSIS:............................................................................................................3
1.6.1 Helps in decision-making: ................................................................................................................3
1.6.2 Helps in financial forecasting and planning:..................................................................................3
1.6.3 Helps in communicating:..................................................................................................................4
1.6.4 Helps in co-ordination:......................................................................................................................4
1.6.5 Helps in Control:................................................................................................................................4
1.7 B) UTILITY TO SHAREHOLDERS/INVESTORS:.............................................................................................................4
1.7.1 Utility to Creditors:.............................................................................................................................4
1.7.2 Utility to Employees: .........................................................................................................................4
1.7.3 Utility to Government: .......................................................................................................................5
1.8 ANALYSIS OR INTERPRETATIONS OF RATIOS:............................................................................................................5
1.9 PRINCIPLES OF RATIO SELECTION:.........................................................................................................................5
1.10 ADVANTAGES OF RATIO ANALYSIS: .....................................................................................................................5
1.11 LIMITATIONS OF RATIO ANALYSIS:.......................................................................................................................6
1.12 CLASSIFICATION OF RATIOS........................................................................................................................6
1.13 LIQUIDITY RATIOS.......................................................................................................................................8
1.14 PROFITABILITY RATIOS:.............................................................................................................................10
1.15 OPERATING RATIO.........................................................................................................................................11
1.16 TURNOVER RATIOS ...................................................................................................................................14
1.17 SOLVENCY RATIOS: ...................................................................................................................................19
CHAPTER TWO ..................................................................................................................................22
RESEARCH DESIGN AND METHOD OF STUDY..........................................................................22
2.1 INTRODUCTION: ..............................................................................................................................................22
2.2 STATEMENT OF PROBLEM:.................................................................................................................................22
2.3 OBJECTIVE OF THE STUDY:.................................................................................................................................22
2.3.1 Primary objective:- ..........................................................................................................................23
2.3.2 Secondary objective:- .....................................................................................................................23
2.4 RESEARCH METHODOLOGY: ..............................................................................................................................23
2.5 RESEARCH APPROACH: .....................................................................................................................................23
2.6 LIMITATIONS OF STUDY:....................................................................................................................................23
CHAPTER THREE ..............................................................................................................................24
PROFILE OF THE COMPANY ..........................................................................................................24
3.1 HISTORY OF BANK-E-MILLIE AFGHAN: ................................................................................................................25
3.2 BUSINESS PROFILE ...........................................................................................................................................25
3.2.1 Personal Banking ............................................................................................................................25
3.2.2 Business Banking............................................................................................................................26
3.2.3 Self Service Banking.......................................................................................................................27
3.2.4 Islamic Banking................................................................................................................................27
3.2.5 Treasury............................................................................................................................................27

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3.3 BOARD OF DIRECTORS ......................................................................................................................................27
3.4 BOARD OF MANAGEMENT.................................................................................................................................28
3.5 BOARD OF SUPERVISOR ....................................................................................................................................28
3.6 BUSINESS OBJECTIVES: .....................................................................................................................................28
3.6.1 Vision.................................................................................................................................................28
3.6.2 Mission..............................................................................................................................................28
3.6.3 Core Values .....................................................................................................................................29
3.7 BANK-E-MILLIE AFGHAN TODAY.........................................................................................................................29
3.8 GOVERNANCE STRUCTURE:................................................................................................................................30
CHAPTER FOUR.................................................................................................................................31
RATIO ANALYSIS..............................................................................................................................31
4.1 CURRENT RATIO:.............................................................................................................................................31
4.2 PROFITABILITY PERFORMANCE ...........................................................................................................................32
4.2.1 Return on Assets Ratio (ROA) ......................................................................................................32
4.2.2 Return on Equity (ROE) .................................................................................................................33
4.2.3 Net Interest Margin (NIM)...............................................................................................................34
4.3 LIQUIDITY PERFORMANCE..................................................................................................................................35
4.3.1 Loans to deposit Ratio (LDR) ........................................................................................................36
4.3.2 Loans to total asset ratio (LTA) .....................................................................................................37
4.3.3 Debts to Total Assets Ratio (DTA)................................................................................................39
4.3.4 Debt-to-Equity Ratio (DTE)............................................................................................................40
4.3.5 Equity multiplier Ratio.....................................................................................................................41
4.5 CURRENT CASH DEBT COVERAGE RATIO ..............................................................................................................42
4.6 INTEREST COVERAGE RATIO...............................................................................................................................43
CHAPTER FIVE ..................................................................................................................................45
FINDINGS, SUGGESTION & CONCLUSION..................................................................................45
5.1 MAJOR FINDINGS:...........................................................................................................................................45
5.2 SUMMARY & CONCLUSION:...........................................................................................................................46
5.3 SUGGESTIONS AND RECOMMENDATION:..............................................................................................................47
5.4 STATEMENTS OF FINANCIAL POSITION .................................................................................................................48
5.5 STATEMENT OF PROFIT OR LOSS .........................................................................................................................49
5.6 REFERENCES ...................................................................................................................................................50

1
CHAPTER ONE
Background of the study
1.1 Importance of finance:
Finance is regarded as the “LIFEBLOOD OF EVERY ENTERPRISE”.
This is because in the modern money-oriented economy, finance is one
of the basic foundation of all kinds if economic activities. It is the master
key, which provides access to all the sources for being employed in
manufacturing and merchandising activities.
It is rightly been said that business needs money to make more
money. However, it is also true that begets more money to when it is
properly managed. Hence efficient management of every business
enterprise is closely linked with efficient management of its finance.

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1.2 Introduction to Financial Ratio Analysis:
The analysis of the financial statements and interpretations of financial results of a particular
period of operations with the help of 'ratio' is termed as "ratio analysis." Ratio analysis is
used to determine the financial soundness of a business concern. Alexander Wall designed
a system of ratio analysis and presented it in useful form in the year 1909.
Financial ratio analysis is the process of calculating financial ratios, which are mathematical
indicators calculated by comparing key financial information appearing in financial
statements of a business, and analyzing those to find out reasons behind the business’s
current financial position and its recent financial performance, and develop expectation
about its future outlook.
Financial ratio analysis is very useful tool because it simplifies the process of financial
comparison of two or more businesses. Direct comparison of financial statements is not
efficient due to difference in the size of relevant businesses. Financial ratio analysis makes
the financial statements comparable both among different businesses and across different
periods of a single business.
There are different financial ratios to analyze different aspects of a business’ financial
position, performance and cash flows. Financial ratios are calculated and analyzed in a
particular situation depend on the user of the financial statements. For example, a
shareholder is primarily concerned about a business’s profitability and solvency; a debt-
holder is concerned about his solvency, liquidity and profitability in the descending order of
importance; a creditor/supplier is worried mainly about the business’ liquidity, etc.
1.3 Meaning and Definition
The term 'ratio' refers to the mathematical relationship between any two inter-related
variables. In other words, it establishes relationship between two items expressed in
quantitative form.
According J. Batty, Ratio can be defined as "the term accounting ratio is used to describe
significant relationships which exist between figures shown in a balance sheet and profit and
loss account in a budgetary control system or any other part of the accounting
management."
Ratio can be used in the form of: (1) percentage (20%), (2) Quotient (say 10) and (3) Rates.
In other words, it can be expressed as: a to b; a: b (a is to b) or as a simple fraction, integer
and decimal. A ratio is calculated by dividing one item or figure by another item or figure.
1.4 Nature of Ratio Analysis:
Ratio analysis is a technique of analysis and interpretation of financial statements. It is the
process of establishing and interpreting various ratios for helping in making certain
decisions. However, ratio analysis is not an end in itself. It is only a means of better
understanding of financial strengths and weaknesses of a firm.
Calculation of mere ratios does not serve any purpose, unless several appropriate ratios are
analyzed and interpreted. There are a number of ratios which can be calculated from the
information given in the financial statements, but the analyst has to select the appropriate
data and calculate only a few appropriate ratios from the same keeping in mind the objective
of analysis. The ratios may be used as a symptom like blood pressure, the pulse rate or the
body temperature and their interpretation depends upon the caliber and competence of the
analyst.

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The followings are the four steps involved in the ratio analysis:
1. Selection of relevant data from the financial statements depending upon the
objective of the analysis.
2. Calculation of appropriate ratios from the above data.
3. Comparison of the calculated ratios with the ratios of the same firm in the past, or
the ratios developed from projected financial statements or the ratios of some other
firms or the comparison with ratios of the industry to which the firm belongs.
4. Interpretation of the ratios.
1.5 Uses of Ratio Analysis:
The ratio analysis is one of the most powerful tools of financial analysis. It is used as a
device to analyze and interpret the financial health of enterprise. Just like a doctor examines
his patient by recording his body temperature, blood pressure, etc. before making his
conclusion regarding the illness and before giving his treatment, a financial analyst analyses
the financial statements with various tools of analysis before commenting upon the financial
health or weaknesses of an enterprise.
‘A ratio is known as a symptom like blood pressure, the pulse rate or the temperature of an
individual.’ It is with help of ratios that the financial statements can be analyzed more clearly
and decisions made from such analysis. The use of ratios is not confined to financial
managers only. There are different parties interested in the ratio analysis for knowing the
financial position of a firm for different purposes.
The supplier of goods on credit, banks, financial institutions, investors, shareholders and
management all make use of ratio analysis as a tool in evaluating the financial position and
performance of a firm for granting credit, providing loans or making investments in the firm.
With the use of ratio analysis one can measure the financial condition of a firm and can point
out whether the condition is strong, good, questionable or poor. The conclusions can also be
drawn as to whether the performance of the firm is improving or deteriorating.
1.6 a) Managerial Uses of Ratio Analysis:
1.6.1 Helps in decision-making:
Financial statements are prepared primarily for decision-making. But the information
provided in financial statements is not an end in itself and no meaningful conclusion can be
drawn from these statements alone. Ratio analysis helps in making decisions from the
information provided in these financial statements.
1.6.2 Helps in financial forecasting and planning:
Ratio Analysis is of much help in financial forecasting and planning. Planning is looking
ahead and the ratios calculated for a number of years work as a guide for the future.
Meaningful conclusions can be drawn for future from these ratios. Thus, ratio analysis helps
in forecasting and planning.

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1.6.3 Helps in communicating:
The financial strength and weakness of a firm are communicated in a more easy and
understandable manner by the use of ratios. The information contained in the financial
statements is conveyed in a meaningful manner to the one for whom it is meant. Thus, ratios
help in communication and enhance the value of the financial statements.
1.6.4 Helps in co-ordination:
Ratios even help in co-ordination which is of utmost importance in effective business
management. Better communication of efficiency and weakness of an enterprise results in
better co-ordination in the enterprise.
1.6.5 Helps in Control:
Ratio analysis even helps in making effective control of the business. Standard ratios can be
based upon preform financial statements and variances or deviations, if any, can be found
by comparing the actual with the standards so as to take a corrective action at the right time.
The weaknesses or otherwise, if any, come to the knowledge of the management which
helps in effective control of the business.
1.7 b) Utility to Shareholders/Investors:
An investor in the company will like to assess the financial position of the concern where he
is going to invest. His first interest will be the security of his investment and then a return in
the form of dividend or interest. For the first purpose he will try to assess the value of fixed
assets and the loans raised against them. The investor will feel satisfied only if the concern
has sufficient amount of assets.
Long-term solvency ratios will help him in assessing financial position of the concern.
Profitability ratios, on the other hand, will be useful to determine profitability position. Ratio
analysis will be useful to the investor in making up his mind whether present financial
position of the concern warrants further investment or not
1.7.1 Utility to Creditors:
The creditors or suppliers extend short-term credit to the concern. They are interested to
know whether financial position of the concern warrants their payments at a specified time or
not. The concern pays short- term creditor, out of its current assets. If the current assets are
quite sufficient to meet current liabilities then the creditor will not hesitate in extending credit
facilities. Current and acid-test ratios will give an idea about the current financial position of
the concern.
1.7.2 Utility to Employees:
The employees are also interested in the financial position of the concern especially
profitability. Their wage increases and amount of fringe benefits are related to the volume of
profits earned by the concern. The employees make use of information available in financial
statements. Various profitability ratios relating to gross profit, operating profit, net profit, etc.

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enable employees to put forward their viewpoint for the increase of wages and other
benefits.
1.7.3 Utility to Government:
Government is interested to know the overall strength of the industry. Various financial
statements published by industrial units are used to calculate ratios for determining short-
term, long-term and overall financial position of the concerns. Profitability indexes can also
be prepared with the help of ratios. Government may base its future policies on the basis of
industrial information available from various units. The ratios may be used as indicators of
overall financial strength of public as well as private sector, in the absence of the reliable
economic information, governmental plans and policies may not prove successful.
1.8 Analysis or Interpretations of Ratios:
The analysis or interpretations in question may be of various types. The following
approaches are usually found to exist:
1) Interpretation or Analysis of an Individual (or) Single ratio.
2) Interpretation or Analysis by referring to a group of ratios.
3) Interpretation or Analysis of ratios by trend.
4) Interpretations or Analysis by inter-firm comparison.
1.9 Principles of Ratio Selection:
The following principles should be considered before selecting the ratio:
1. Ratio should be logically inter-related.
2. Pseudo ratios should be avoided.
3. Ratio must measure a material factor of business.
4. Cost of obtaining information should be borne in mind.
5. Ratio should be in minimum numbers.
6. Ratio should be facilities comparable.
1.10 Advantages of Ratio Analysis:
Ratio analysis is necessary to establish the relationship between two accounting figures to
highlight the significant information to the management or users who can analyze the
business situation and to monitor their performance in a meaningful way. The following are
the advantages of ratio analysis:
1. It facilitates the accounting information to be summarized and simplified in a required
form.
2. It highlights the inter-relationship between the facts and figures of various segments of
business.
3. Ratio analysis helps to remove all type of wastages and inefficiencies.
4. It provides necessary information to the management to take prompt decision relating to
business.
5. It helps to the management for effectively discharge its functions such as planning,
organizing, controlling, directing and forecasting.
6. Ratio analysis reveals profitable and unprofitable activities. Thus, the management is
able to concentrate on unprofitable activities and consider to improve the efficiency.

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7. Ratio analysis is used as a measuring rod for effective control of performance of
business activities.
8. Ratios are an effective means of communication and informing about financial
soundness made by the business concern to the proprietors, investors, creditors and
other parties.
9. Ratio analysis is an effective tool which is used for measuring the operating results of the
enterprises.
10. It facilitates control over the operation as well as resources of the business.
11. Effective co-operation can be achieved through ratio analysis.
12. Ratio analysis provides all assistance to the management to fix responsibilities.
13. Ratio analysis helps to determine the performance of liquidity, profitability and solvency
position of the business concern.
1.11 Limitations of Ratio Analysis:
Ratio analysis is one of the important techniques of determining the performance of financial
strength and weakness of a firm. Though ratio analysis is relevant and useful technique for
the business concern, the analysis is based on the information available in the financial
statements. There are some situations, where ratios are misused, it may lead the
management to wrong direction. The ratio analysis suffers from the following limitations:
1. Ratio analysis is used on the basis of financial statements. Number of limitations of
financial statements may affect the accuracy or quality of ratio analysis.
2. Ratio analysis heavily depends on quantitative facts and figures and it ignores qualitative
data. Therefore this may limit accuracy.
3. Ratio analysis is a poor measure of a firm's performance due to lack of adequate
standards laid for ideal ratios.
4. It is not a substitute for analysis of financial statements. It is merely used as a tool for
measuring the performance of business activities.
5. Ratio analysis clearly has some latitude for window dressing.
6. It makes comparison of ratios between companies which is questionable due to
differences in methods of accounting operation and financing.
7. Ratio analysis does not consider the change in price level, as such, these ratio will not
help in drawing meaningful inferences.
1.12 CLASSIFICATION OF RATIOS
Accounting Ratios are classified on the basis of the different parties interested in making use
of the ratios. A very large number of accounting ratios are used for the purpose of
determining the financial position of a concern for different purposes. Ratios may be broadly
classified in to:
 Classification of Ratios on the basis of Balance Sheet.
 Classification of Ratios on the basis of Profit and Loss Account.
 Classification of Ratios on the basis of Mixed Statement (or) Balance Sheet and Profit
and Loss Account.
This classification is further grouped into:
 Liquidity Ratios

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 Profitability Ratios
 Turnover Ratios
 Solvency Ratios
 Overall Profitability Ratios
Classification of Ratios on the basis of Balance Sheet: Balance sheet ratios which
establish the relationship between two balance sheet items. For example, Current Ratio,
Fixed Asset Ratio, Capital Gearing Ratio and Liquidity Ratio etc.
Classification on the basis of Income Statements: These ratios deal with the relationship
between two items or two group of items of the income statement or profit and loss account.
For example, Gross Profit Ratio, Operating Ratio, Operating Profit Ratio, and Net Profit Ratio
etc.
Classification on the basis of Mixed Statements: These ratios also known as Composite
or Mixed Ratios or Inter Statement Ratios. The inter statement ratios which deal with
relationship between the item of profit and loss account and item of balance sheet. For
example, return on Investment Ratio, Net Profit to Total Asset Ratio, Creditor's Turnover
Ratio, Earning per Share Ratio and Price Earnings Ratio etc.
A chart for classification of ratios by statement is given below showing clearly the types of
ratios may be broadly classified on the basis of Income Statement and Balance Sheet.
Classification of Ratios by Statement
On the basis of on the basis of on the basis of
Balance Sheet Profit and Loss Account Profit and Loss Account and
balance sheet
a
1. Current Ratio
2. Liquid Ratio
3. Absolute Liquid Ratio
4. Debt Equity Ratio
5. Proprietary Ratio
6. Capital Gearing Ratio
7. Assets-Proprietorship
Ratio
8. Capital Inventory to
Working Capital Ratio
9. Ratio of Current Assets to
Fixed Assets
1. Gross Profit Ratio
2. Operating Ratio
3. Operating Profit Ratio
4. Net Profit Ratio
5. Expense Ratio
6. Interest Coverage
Ratio
1. Stock Turnover Ratio
2. Debtors Turnover Ratio
3. Payable Turnover Ratio
4. Fixed Asset Turnover Ratio
5. Return on Equity
6. Return on Shareholder's Fund
7. Return on Capital Employed
8. Capital Turnover Ratio
9. Working Capital Turnover Ratio
10. Return on Total Resources
11. Total Assets Turnover

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1.13 LIQUIDITY RATIOS
Liquidity Ratios are also termed as Short-Term Solvency Ratios. The term liquidity means
the extent of quick convertibility of assets in to money for paying obligation of short-term
nature. Accordingly, liquidity ratios are useful in obtaining an indication of a firm's ability to
meet its current liabilities, but it does not reveal h0w effectively the cash resources can be
managed. To measure the liquidity of a firm, the following ratios are commonly used:
1. Current Ratio.
2. Quick Ratio (or) Acid Test or Liquid Ratio.
3. Absolute Liquid Ratio (or) Cash Position Ratio.
Current Ratio
Current Ratio establishes the relationship between current Assets and current Liabilities. It
attempts to measure the ability of a firm to meet its current obligations. In order to compute
this ratio, the following formula is used:
𝐜𝐮𝐫𝐞𝐧𝐭 𝐫𝐚𝐭𝐢𝐨 =
current Asset
cerent liabilty
The two basic components of this ratio are current assets and current liabilities. Current
asset normally means assets which can be easily converted in to cash within a year's time.
On the other hand, current liabilities represent those liabilities which are payable within a
year. The following table represents the components of current assets and current liabilities
in order to measure the current ratios:
Components of Current Assets and Current Liabilities
Current Assets Current Liabilities
1. Cash in Hand
2. Cash at Bank
3. Sundry Debtors
4. Bills Receivable
5. Marketable Securities ( Short-Term)
6. Other Short-Term Investments
7. Inventories :
a) Stock of raw materials
b) Stock of work in progress
c) Stock of finished goods
1. Sundry Creditors (Accounts Payable)
2. Bills Payable
3. Outstanding and Accrued Expenses
4. Income Tax Payable
5. Short-Term Advances
6. Unpaid or Unclaimed Dividend
7. Bank Overdraft (Short-Term period)

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Interpretation of Current Ratio:
The ideal current ratio is 2: 1. It indicates that current assets double the current liabilities is
considered to be satisfactory. Higher value of current ratio indicates more liquid of the firm's
ability to pay its current obligation in time. On the other hand, a low value of current ratio
means that the firm may find it difficult to pay its current ratio as one which is generally
recognized as the patriarch among ratios.
Quick Ratio (or) Acid Test or Liquid Ratio
Quick Ratio also termed as Acid Test or Liquid Ratio. It is supplementary to the current ratio.
The acid test ratio is a more severe and stringent test of a firm's ability to pay its short-term
obligations 'as and when they become due. Quick Ratio establishes the relationship between
the quick assets and current liabilities. In order to compute this ratio, the below presented
formula is used:
𝐪𝐮𝐢𝐜𝐤 𝐫𝐚𝐭𝐢𝐨 =
quick Assets
(Current Assets − Stock and Prepaid Expenses)
cerent liabilities
Quick Ratio can be calculated by two basic components of quick assets and current
liabilities.
Quick Assets = Current Assets - (Inventories + Prepaid expenses)
Current liabilities represent those liabilities which are payable within a year.
Interpretation of Quick Ratio:
The ideal Quick Ratio of I: I is considered to be satisfactory. High Acid Test Ratio is an
indication that the firm has relatively better position to meet its current obligation in time. On
the other hand, a low value of quick ratio exhibiting that the firm's liquidity position is not
good.
Advantages:
1. Quick Ratio helps to measure the liquidity position of a firm.
2. It is used as a supplementary to the current ratio.
3. It is used to remove inherent defects of current ratio.
Absolute Liquid Ratio
Absolute Liquid Ratio is also called as Cash Position Ratio (or) Over Due Liability Ratio. This
ratio established the relationship between the absolute liquid assets and current liabilities.
Absolute Liquid Assets include cash in hand, cash at bank, and marketable securities or
temporary investments. The optimum value for this ratio should be one, i.e., 1: 2. It indicates
that 50% worth absolute liquid assets are considered adequate to pay the 100% worth
current liabilities in time. If the ratio is relatively lower than one, it represents that the
company's day-to-day cash management is poor. If the ratio is considerably more than one,

10
the absolute liquid ratio represents enough funds in the form of cash to meet its short-term
obligations in time. The Absolute Liquid ratio can be calculated by dividing the total of the
Absolute Liquid Assets by Total Current liabilities’. Thus,
𝐀𝐛𝐬𝐨𝐥𝐮𝐭𝐞 𝐋𝐢𝐪𝐮𝐢𝐝 𝐑𝐚𝐭𝐢𝐨 =
Absolute Liquid Assets
Current Liabilities
1.14 PROFITABILITY RATIOS:
The term profitability means the profit earning capacity of any business activity. Thus, profit
earning may be judged on the volume of profit margin of any activity and is calculated by
subtracting costs from the total revenue accruing to a firm during a particular period.
Profitability Ratio is used to measure the overall efficiency or performance of a business.
Generally, a large number of ratios can also be used for determining the profitability as the
same is related to sales or investments.
The following important profitability ratios are discussed below:
1. Gross Profit Ratio.
2. Operating Ratio.
3. Operating Profit Ratio.
4. Net Profit Ratio.
5. Return on Investment Ratio.
6. Return on Capital Employed Ratio.
7. Earnings per Share Ratio.
8. Dividend Payout Ratio.
9. Dividend Yield Ratio.
10. Price Earnings Ratio.
11. Net Profit to Net worth Ratio.
Gross Profit Ratio
Gross Profit Ratio established the relationship between gross profit and net sales. This ratio
is calculated by dividing the Gross Profit by Sales. It is usually indicated as percentage.
𝐆𝐫𝐨𝐬𝐬 𝐏𝐫𝐨𝐟𝐢𝐭 𝐑𝐚𝐭𝐢𝐨 =
Gross Profit
Net Sales
X 100
Gross Profit = Sales - Cost of Goods Sold
Net Sales = Gross Sales - Sales Return (or) Return Inwards
Higher Gross Profit Ratio is an indication that the firm has higher profitability. It also reflects
them effective standard of performance of firm's business. Higher Gross Profit Ratio will be
result of the following factors.
1. Increase in selling price, i.e., sales higher than cost of goods sold.
2. Decrease in cost of goods sold with selling price remaining constant.

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3. Increase in selling price without any corresponding proportionate increase in cost.
4. Increase in the sales mix.
A low gross profit ratio generally indicates the result of the following factors:
1. Increase in cost of goods sold.
2. Decrease in selling price.
3. Decrease in sales volume.
4. High competition.
5. Decrease in sales mix.
1.15 Operating Ratio
Operating Ratio is calculated to measure the relationship between total operating expenses
and sales. The total operating expenses is the sum total of cost of goods sold, office and
administrative expenses and selling and distribution expenses. In other words, this ratio
indicates a firm's ability to cover total operating expenses. In order to compute this ratio, the
following formula is used:
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐑𝐚𝐭𝐢𝐨 =
Operating Cost
Net Sales
X 100
Operating Cost = Cost of goods sold + Administrative Expenses + Selling and Distribution Expenses
Net Sales = Sales - Sales Return (or) Return Inwards.
Operating Profit Ratio
Operating Profit Ratio indicates the operational efficiency of the firm and is a measure of the
firm's ability to cover the total operating expenses. Operating Profit Ratio can be calculated
as:
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭 𝐑𝐚𝐭𝐢𝐨 =
Operating Profit
Net Sales
X 100
Operating Profit = Net Sales - Operating Cost
(Or)
= Net Sales - (Cost of Goods Sold + Office and Administrative
Expenses + Selling and Distribution Expenses)
(Or)
= Gross Profit - Operating Expenses
(Or)
= Net Profit + Non-Operating Expenses -Non-Operating Income.
Net Sales = Sales - Sales Return (or) Return Inwards
Net Profit Ratio

12
Net Profit Ratio is also termed as Sales Margin Ratio (or) Profit Margin Ratio (or) Net Profit
to Sales Ratio. This ratio reveals the firm's overall efficiency in operating the business. Net
profit Ratio is used to measure the relationship between net profit (either before or after
taxes) and sales. This ratio can be calculated by the following formula:
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭 𝐑𝐚𝐭𝐢𝐨 =
Net Profit After Tax
Net Sales
X 100
Net profit includes non-operating incomes and profits. Non-Operating Incomes such as
dividend received, interest on investment, profit on sales of fixed assets, commission
received, discount received etc. Profit or Sales Margin indicates margin available after
deduction cost of production, other operating expenses, and income tax from the sales
revenue. Higher Net Profit Ratio indicates the standard performance of the business
concern.
Return on Investment Ratio
This ratio is also called as ROL This ratio measures a return on the owner's or shareholders'
investment. This ratio establishes the relationship between net profit after interest and taxes
and the owner's investment. Usually this is calculated in percentage. This ratio, thus. can be
calculated as :
𝐑𝐞𝐭𝐮𝐫𝐧 𝐨𝐧 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐑𝐚𝐭𝐢𝐨 =
Net Profit (after interest and tax)
Shareholders′ Fund (or) Investments
X 100
Shareholder's Investments = Equity Share Capital + Preference Share Capital + Reserves
and Surplus- Accumulated Losses.
Net Profit = Net Profit - Interest and Taxes
Return on Capital Employed Ratio:
Return on Capital Employed Ratio measures a relationship between profit and capital
employed. This ratio is also called as Return on Investment Ratio. The term return means
Profits or Net Profits. The term Capital Employed refers to total investments made in the
business. The concept of capital employed can be considered further into the following
ways:
A. Gross Capital Employed
B. Net Capital Employed
C. Average Capital Employed
D. Proprietor's Net Capital Employed
Gross Capital Employed = Fixed Assets + Current Assets
Net Capital Employed=Total Assets - Current Liabilities Opening Capital Employed + Closing
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝 =
Capital Employed
2
Average Capital Employed = Net Capital Employed + ½ of Profit after Tax
Proprietor's Net Capital Employed = Fixed Assets + Current Assets

13
- Outside Liabilities (both long-term and short-term)
In order to compute this ratio, the below presented formulas are used:
𝐑𝐞𝐭𝐮𝐫𝐧 𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝 =
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠
𝐺𝑟𝑜𝑠𝑠 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑋 100
(Or)
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐺𝑟𝑜𝑠𝑠 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑋 100
(Or)
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑋 100
Earnings per Share Ratio:
Earnings per Share Ratio (EPS) measures the earning capacity of the concern from the
owner's point of view and it is helpful in determining the price of the equity share in the
market place. Earnings per Share Ratio can be calculated as:
𝐄𝐚𝐫𝐧𝐢𝐧𝐠 𝐏𝐞𝐫 𝐒𝐡𝐚𝐫𝐞 𝐑𝐚𝐭𝐢𝐨 =
Net Profit After Tax and Preference Dividend
No. of Equity Shares
Dividend Payout Ratio:
This ratio highlights the relationship between payment of dividend on equity share capital
and the profits available after meeting tax and preference dividend. This ratio indicates the
dividend policy adopted by the top management about utilization of divisible profit to pay
dividend or to retain or both. The ratio, thus, can be calculated as:
𝐃𝐢𝐯𝐢𝐝𝐞𝐧𝐝 𝐏𝐚𝐲𝐨𝐮𝐭 𝐑𝐚𝐭𝐢𝐨 =
Equity Dividend
Net Profit After Tax and Preference Dividend
Or
𝐃𝐢𝐯𝐢𝐝𝐞𝐧𝐝 𝐏𝐚𝐲𝐨𝐮𝐭 𝐑𝐚𝐭𝐢𝐨 =
𝐸𝑞𝑢𝑖𝑡𝑦 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑃𝑒𝑟 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒
𝑋 100
Dividend Yield Ratio:
Dividend Yield Ratio indicates the relationship is established between dividend per share
and market value per share. This ratio is a major factor that determines the dividend income
from the investors' point of view. It can be calculated by the following formula:
𝐃𝐢𝐯𝐢𝐝𝐞𝐧𝐝 𝐘𝐢𝐞𝐥𝐝 𝐑𝐚𝐭𝐢𝐨 =
Dividend Per Share
Market Value Per Share
X 100
Price Earnings Ratio:

14
This ratio highlights the earning per share reflected by market share. Price Earnings Ratio
establishes the relationship between the market price of an equity share and the earning per
equity share. This ratio helps to find out whether the equity shares of a company are
undervalued or not. This ratio is also useful in financial forecasting. This ratio is calculated
as:
𝐏𝐫𝐢𝐜𝐞 𝐄𝐚𝐫𝐧𝐢𝐧𝐠 𝐑𝐚𝐭𝐢𝐨 =
Market Price Per Equity Share
Earning Per Share
1.16 TURNOVER RATIOS
Turnover Ratios may be also termed as Efficiency Ratios or Performance Ratios or Activity
Ratios.
Turnover Ratios highlight the different aspect of financial statement to satisfy the
requirements of different parties interested in the business. It also indicates the effectiveness
with which different assets are vitalized in a business. Turnover means the number of times
assets are converted or turned over into sales. The activity ratios indicate the rate at which
different assets are turned over.
Depending upon the purpose, the following activities or turnover ratios can be
calculated:
1. Inventory Ratio or Stock Turnover Ratio (Stock Velocity)
2. Debtor's Turnover Ratio or Receivable Turnover Ratio (Debtor's Velocity)
A. Debtor's Collection Period Ratio
3. Creditor's Turnover Ratio or Payable Turnover Ratio (Creditor's Velocity)
A. Debt Payment Period Ratio
4. Working Capital Turnover Ratio
5. Fixed Assets Turnover Ratio
6. Capital Turnover Ratio.
Stock Turnover Ratio:
This ratio is also called as Inventory Ratio or Stock Velocity Ratio.
Inventory means stock of raw materials, working in progress and finished goods. This ratio is
used to measure whether the investment in stock in trade is effectively utilized or not. It
reveals the relationship between sales and cost of goods sold or average inventory at cost
price or average inventory at selling price. Stock Turnover Ratio indicates the number of
times the stock has been turned over in business during a particular period. While using this
ratio, care must be taken regarding season and condition. Price trend. Supply condition etc.
In order to compute this ratio, the following formulae are used:
1. 𝐒𝐭𝐨𝐜𝐤 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
Cost of Goods Sold
Average Inventory at Cost

15
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses - Closing Stock
(Or)
Cost of Goods Sold = Total Cost of Production + Opening Stock of Finished Goods - Closing
Stock of Finished Goods
Total Cost of Production = Cost of Raw Material Consumed + Wages + Factory Cost
(Or)
Total Cost of Production = Sales - Gross Profit
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐒𝐭𝐨𝐜𝐤 =
Opening Stock + Closing Stock
2
Net Sales
Average Inventory at Cost
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑎𝑡 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
The above said formulas can be used on the basis of the information given in the
illustration.
Debtor's Turnover Ratio:
Debtor's Turnover Ratio is also termed as Receivable Turnover Ratio or Debtor's Velocity.
Receivables and Debtors represent the uncollected portion of credit sales. Debtor's Velocity
indicates the number of times the receivables are turned over in business during a particular
period. In other words, it represents how quickly the debtors are converted into cash. It is
used to measure the liquidity position of a concern. This ratio establishes the relationship
between receivables and sales. Two kinds of ratios can be used to judge a firm's liquidity
position on the basis of efficiency of credit collection and credit policy.
They are (A) Debtor's Turnover Ratio and (B) Debt Collection Period. These ratios may be
computed as:
𝐃𝐞𝐛𝐭𝐨𝐫′𝐬 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
Net Credit Sales
Average Receivables
Or
Net Credit Sales = Total Sales - (Cash Sales + Sales Return)
Accounts Receivable = Sundry Debtors or Trade Debtors + Bills Receivable
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐬 𝐑𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞 =
Opening Receivable + Closing Receivable
2

16
It is to be noted that opening and closing receivable and credit sales are not available, the
ratio may be calculated as:
𝐃𝐞𝐛𝐭𝐨𝐫′𝐬 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
Total Sales
Accounts Receivable
Debt Collection Period Ratio:
This ratio indicates the efficiency of the debt collection period and the extent to which the
debt have been converted into cash. This ratio is complementary to the Debtor Turnover
Ratio. It is very helpful to the management because it represents the average debt collection
period. The ratio can be calculated as follows:
a) 𝐃𝐞𝐛𝐭 𝐂𝐨𝐥𝐥𝐞𝐜𝐭𝐢𝐨𝐧 𝐏𝐞𝐫𝐢𝐨𝐝 𝐑𝐚𝐭𝐢𝐨 =
Months (or)Days in a year
Debtor′s Turnover
(Or)
b) 𝐃𝐞𝐛𝐭 𝐂𝐨𝐥𝐥𝐞𝐜𝐭𝐢𝐨𝐧 𝐏𝐞𝐫𝐢𝐨𝐝 𝐑𝐚𝐭𝐢𝐨 =
Average Accounts Receivable x Months (or) Days in a year
Net Credit Sales for the year
Creditor's Turnover Ratio:
Creditor's Turnover Ratio is also called as Payable Turnover Ratio or Creditor's Velocity. The
credit purchases are recorded in the accounts of the buying companies as Creditors to
Accounts Payable. The Term Accounts Payable or Trade Creditors include sundry creditors
and bills payable. This ratio establishes the relationship between the net credit purchases
and the average trade creditors. Creditor's velocity ratio indicates the number of times with
which the payment is made to the supplier in respect of credit purchases. Two kinds of ratios
can be used for measuring the efficiency of payable of a business concern relating to credit
purchases. They are: (1) Creditor's Turnover Ratio (2) Creditor's Payment Period or Average
Payment Period. The ratios can be calculated by the following formulas:
a) 𝐂𝐫𝐞𝐝𝐢𝐭𝐨𝐫′𝐬 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
Net Credit Purchases
Average Accounts Payable
Net Credit Purchases = Total Purchases - Cash Purchases
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐬 𝐏𝐚𝐲𝐚𝐛𝐥𝐞 =
𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 + 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
2
b) 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐏𝐞𝐫𝐢𝐨𝐝 =
Month (or) Days in a year
Creditors Turnover Ratio
(Or)
𝐜𝐮𝐫𝐞𝐧𝐭 𝐫𝐚𝐭𝐢𝐨 =
Average Trade Creditors
Net Credit Purchases
X 365
Significance:

17
A high Creditor's Turnover Ratio signifies that the creditors are being paid promptly. A lower
ratio indicates that the payment of creditors are not paid in time. Also, high average payment
period highlight the unusual delay in payment and it affect the creditworthiness of the firm. A
low average payment period indicates enhancing the creditworthiness of the company.
Working Capital Turnover Ratio:
This ratio highlights the effective utilization of working capital with regard to sales. This ratio
represent the firm's liquidity position. It establishes relationship between cost of sales and
networking capital. This ratio is calculated as follows:
𝐖𝐨𝐫𝐤𝐢𝐧𝐠 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
Net Sales
Working Capital
Net Sales = Gross Sales - Sales Return
Work Capital = Current Assets - Current Liabilities
Significance:
It is an index to know whether the working capital has been effectively utilized or not in
making sales. A higher working capital turnover ratio indicates efficient utilization of working
capital, i.e., a firm can repay its fixed liabilities out of its working capital. Also, a lower
working capital turnover ratio shows that the firm has to face the shortage of working capital
to meet its day-to-day business activities unsatisfactorily.
Fixed Assets Turnover Ratio:
This ratio indicates the efficiency of assets management. Fixed Assets Turnover Ratio is
used to measure the utilization of fixed assets. This ratio establishes the relationship
between cost of goods sold and total fixed assets. Higher the ratio highlights a firm has
successfully utilized the fixed assets. If the ratio is depressed, it indicates the underutilization
of fixed assets. The ratio may also be calculated as:
𝐅𝐢𝐱𝐞𝐝 𝐀𝐬𝐬𝐞𝐭𝐬 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
(Or)
𝐅𝐢𝐱𝐞𝐝 𝐀𝐬𝐬𝐞𝐭𝐬 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝑆𝑎𝑙𝑒𝑠
𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
Components of Fixed Assets (or) Non-Current Assets:
(1) Goodwill
(2) Land and Building

18
(3) Plant and Machinery
(4) Furniture and Fittings
(5) Trade Mark
(6) Patent Rights and Livestock
(7) Long-Term Investment
(8) Debt Balance of Profit and Loss Account
(9) Discount on Issue of Shares
(10) Discount on Issue of Debenture
(11) Preliminary Expenses
(12) Other Deferred Expenses
(14) Government or Trust Securities
(15) Any other immovable Prosperities
Capital Turnover Ratio:
This ratio measures the efficiency of capital utilization in the business. This ratio establishes
the relationship between cost of sales or sales and capital employed or shareholders' fund.
This ratio may also be calculated as:
1. 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
Cost of Sales
Capital Employed
Or
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
Capital Employed = Shareholders' Funds + Long-Term Loans (Or)
Capital Employed = Shareholders' Funds + Long-Term Loans (Or)
Capital Employed = Total Assets - Current Liabilities
2. 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐓𝐮𝐫𝐧𝐨𝐯𝐞𝐫 𝐑𝐚𝐭𝐢𝐨 =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐹𝑢𝑛𝑑
or
sales
Shareholders′ Fund
Components of Capital Employed (Shareholders' Fund + Long-Term Loans)
(1) Equity Share Capital
(2) Preference Share Capital
(3) Debentures
(4) Long-Term Loans
(5) Share Premium
(6) Credit Balance of Profit and Loss Account
(7) Capital Reserve
(8) General Reserve

19
(9) Provisions
(10) Appropriation of Profits
1.17 SOLVENCY RATIOS:
The term 'Solvency' generally refers to the capacity of the business to meet its short-term
and long-term obligations. Short-term obligations include creditors, bank loans and bills
payable etc. Long-term obligations consists of debenture, long-term loans and long-term
creditors etc. Solvency Ratio indicates the sound financial position of a concern to carryon its
business smoothly and meet its all obligations.
Liquidity Ratios and Turnover Ratios concentrate on evaluating the short-term solvency of
the concern have already been explained. Now under this part of the chapter only the long-
term solvency ratios are dealt with. Some of the important ratios which are given below in
order to determine the solvency of the concern:
(1) Debt - Equity Ratio
(2) Proprietary Ratio
(3) Capital Gearing Ratio
(4) Debt Service Ratio or Interest Coverage Ratio
Debt Equity Ratio:
This ratio also termed as External - Internal Equity Ratio. This ratio is calculated to ascertain
the firm's obligations to creditors in relation to funds invested by the owners. The ideal Debt
Equity Ratio is 1:1. This ratio also indicates all external liabilities to owner recorded claims. It
may be calculated as:
𝐃𝐞𝐛𝐭 − 𝐄𝐪𝐮𝐢𝐭𝐲 𝐑𝐚𝐭𝐢𝐨 =
External Equities
Internal Equities
Or
Outsider′s Funds
Shareholders′ Funds
The term External Equities refers to total outside liabilities and the term Internal Equities
refers to all claims of preference shareholders and equity shareholders' and reserve and
surpluses.
𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑛𝑔−𝑇𝑒𝑟𝑚 𝐷𝑒𝑝𝑡
𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑛𝑔−𝑇𝑒𝑟𝑚 𝐹𝑢𝑛𝑑𝑠
(Or)
𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑛𝑔 − 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐹𝑢𝑛𝑑𝑠
The term Total Long-Term Debt refers to outside debt including debenture and long-term
loans raised from banks.
Significance:

20
This ratio indicates the proportion of owner's stake in the business. Excessive liabilities tend
to cause insolvency. This ratio also tell the extent to which the firm depends upon outsiders
for its existence.
Proprietary Ratio:
Proprietary Ratio is also known as Capital Ratio or Net Worth to Total Asset Ratio. This is
one of the variant of Debt-Equity Ratio. The term proprietary fund is called Net Worth. This
ratio shows the relationship between shareholders' fund and total assets. It may be
calculated as:
𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐚𝐫𝐲 𝐑𝐚𝐭𝐢𝐨 =
Shareholders′
Fund
Total Assets
Shareholders' Fund = Preference Share Capital + Equity Share Capital + All
Reserves and Surplus
Total Assets = Tangible Assets + Non-Tangible Assets + Current Assets (or) All Assets
including Goodwill
Significance:
This ratio used to determine the financial stability of the concern in general.
Proprietary Ratio indicates the share of owners in the total assets of the company. It serves
as an indicator to the creditors who can find out the proportion of shareholders' funds in the
total assets employed in the business. A higher proprietary ratio indicates relatively little
secure position in the event of solvency of a concern. A lower ratio indicates greater risk to
the creditors. A ratio below 0.5 is alarming for the creditors.
Capital Gearing Ratio:
This ratio also called as Capitalization or Leverage Ratio. This is one of the Solvency Ratios.
The term capital gearing refers to describe the relationship between fixed interest and/or
fixed dividend bearing securities and the equity shareholders' fund. It can be calculated as
shown below:
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐆𝐞𝐚𝐫𝐢𝐧𝐠 𝐑𝐚𝐭𝐢𝐨 =
Equity Share Capital
Fixed Interest Bearing Funds
Equity Share Capital = Equity Share Capital + Reserves and Surplus
Fixed Interest Bearing Funds = Debentures + Preference Share Capital + Other Long-Term
Loans
A high capital gearing ratio indicates a company is having large funds bearing fixed interest
and/or fixed dividend as compared to equity share capital. A low capital gearing ratio
represents preference share capital and other fixed interest bearing loans are less than
equity share capital.
Debt Service Ratio:

21
Debt Service Ratio is also termed as Interest Coverage Ratio or Fixed Charges Cover Ratio.
This ratio establishes the relationship between the amount of net profit before deduction of
interest and tax and the fixed interest charges. It is used as a yardstick for the lenders to
know the business concern will be able to pay its interest periodically. Debt Service Ratio is
calculated with the help of the following formula:
𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐂𝐨𝐯𝐞𝐫𝐚𝐠𝐞 𝐑𝐚𝐭𝐢𝐨 =
Net Profit before Interest and Income Tax
Fixed Interest Charges
X 100
Significance:
Higher the ratio the more secure the debenture holders and other lenders would be with
respect to their periodical interest income. In other words, better is the position of long-term
creditors and the company's risk is lesser. A lower ratio indicates that the company is not in
a position to pay the interest but also to repay the principal loan on time.
OVERALL PROFITABILITY RATIO:
This ratio used to measure the overall profitability of a firm on the extent of operating
efficiency it enjoys. This ratio establishes the relationship between profitability on sales and
the profitability on investment turnover. Overall all Profitability Ratio may be calculated in the
following ways:
𝐎𝐯𝐞𝐫𝐚𝐥𝐥 𝐏𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐑𝐚𝐭𝐢𝐨 =
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
X
𝑠𝑎𝑙𝑒𝑠
𝑡𝑜𝑡𝑙𝑎 𝑎𝑠𝑠𝑒𝑡

22
CHAPTER TWO
Research Design and Method of study
Title of the Study:
“Financial Ratio Analysis of Bank-e-Millie Afghan
2013-2016”
2.1 Introduction:
When we observed the financial statement comprising the balance sheet and profit or loss
account is that they do not give all the information related to financial operations of firm, they
can provide some extremely useful information to the extent that the balance sheet shows
the financial position on a particular date in terms of structure of assets, liabilities and
owner’s equity and profit or loss account shows the results of operation during the year.
Thus the financial statements will provide a summarized view of the firm. Therefore in order
to learn about the firm the careful examination of a valuable reports and statements through
financial analysis or ratio is required.
2.2 Statement of problem:
To know the financial performance of the organization through ratio analysis, by comparing
three years financial performance of the bank.
The first step while conducting research is careful definition of Research Problem. “To ERR
IS THE HUMAN” is a proverb which indicates that no one is perfect in this world. Every
researcher has to face many problems which conducting any research that’s why problem
statement is defined to know which type of problems a researcher has to face while
conducting any study. It is said that,
“Problem well defined is problem half solved.”
Basically, a problem statement refers to some difficulty, which researcher experiences in the
context of either a theoretical or practical situation and wants to obtain the solution for the
same.
The problem statement here is:-
“TO MAKE A FINANCIAL ANALYSIS OF FINANCIAL STATEMENTS OF Bank-e-Millie
Afghan”
2.3 Objective of the study:
Objectives are the ends that states specifically how goal be achieved. Every study must
have an objective for which all the efforts have been done. Without objective no research
can be conducted and no result can be obtained. On the basis of objective all the research
process is followed. Objectives are the main aspect of every study. The objective of the
study gives direction to go through the research problem. It guides the researcher and keeps
him on track. I have two objectives regarding my research project. These are shown below:-
1. Primary objective

23
2. Secondary objective
2.3.1 Primary objective:-
To analyze the financial statements of the company to assess its true financial position by
the use of ratios.
2.3.2 Secondary objective:-
1) To find out the shortcomings in Bank-e-Millie Afghan.
2) To see whether Bank-e-Millie Afghan is going well or not in different areas.
2.4 Research Methodology:
The required data for the study are basically secondary in nature and the data are collected
from the:
 Audited reports of the company.
 INTERNET – which includes required financial data collected form Bank-e-Millie
Afghan official website i.e. www.bma.com.af and some other websites on the
internet for the purpose of getting all the required financial data of the bank and to
get detailed knowledge about BMA Bank for the convenience of study.
 Broachers of BMA Bank.
2.5 Research Approach:
The conclusion was drawn by observation the collected data and analyzing the same with
analysis and ratio analysis.
2.6 Limitations of study:
1. Difficulty in data collection.
2. Limited knowledge about the bank in the initial stages.
3. Branch manager was reluctant for giving financial data of the bank.
4. The analysis and interpretation are based on secondary data contained in the
published annual reports of ICICI Bank for the study period.
5. Due to the limited time available at the disposable, the study has been confined for a
period of 5 years (2005-2009).
6. Ratio itself will not completely show the company’s good or bad financial position.
7. Inter firm comparison was not possible due to the non-availability of competitors data.
8. The study of financial performance can be only a means to know about the financial
condition of the company and cannot show a through picture of the activities of the
company.

24
CHAPTER THREE
Profile of the company
Type of bank State Owned Commercial Bank
Docket no 16301
Date of establishment 1933
Phone banking 0093-20-2102221
Fax 0093-20-2101801
P.o. Box 522 Kabul Afghanistan
Telex 31 Bankmili AF
Email Info@bma.com.af
Website www.bma.com.af
Swift Bmafafka
Address head branch Ibne sina watt, beside the da Afghanistan bank
Number of male employees 422
Number of female employees 47
Number of total employees 469
Percentage of Male employees 89.98
Percentage of Female
employees
10.02

25
3.1 History of Bank-e-Millie Afghan:
Bank-e- Millie Afghan (BMA) was the first financial institution established in Afghanistan in
1933. Similarly, it was the first financial institution established in a public private partnership
set up with 72 percent share held by private sector. As a first bank in Afghanistan, BMA
introduced formal banking services to the people and government of Islamic Republic of
Afghanistan. Since then, the banks competitive strength and ongoing market leadership
philosophy lays in its strong capital base and proven trustworthiness.
In 1976, it was fully nationalized by the government of Afghanistan. Since its establishment,
BMA is a leading banking in providing modern and secure banking services. Securing
depositors' funds is the top priority of the bank. At the same time, the bank is contributing
considerably to the development of manufacturing, agriculture, services, and international
trade in the country. BMA is operating based on strong corporate governance principles,
financial risk management and strict compliance to keep its credibility and trust. BMA has 15
city branches in Kabul and 21 provincial branches and equity investments in United States of
America and England. And it is celebrating its 84th years of fame.
3.2 Business Profile
Products & services
3.2.1 Personal Banking
 Deposits
 Current Account
 Saving Account
 Term Deposits
 ASSAN Account
 Kids Millionaire Account
 Loans
 Consumer Loans
 International Remittances

26
 SWIFT
 Western Union
 Domestic Remittances
 ACSS
 Lockers
 Payroll Accounts
 Cheque Collections
Corporate & Investment Banking
 Working Capital Finance
 Trade Finance
 BGs
 LCs
3.2.2 Business Banking
 Business Loans
 Business Accounts
 SME Loans

27
3.2.3 Self Service Banking
 E-Statements
 Online (Internet Banking)
 ATM
3.2.4 Islamic Banking
 Islamic Banking Product
 Islamic Current Deposit
 Mudarabha Saving Deposit
 Mudarabha Fixed Deposit
 Musharakah
 Istisna
 Murabahah
 Home Appliance
 Home Financing
 Car Financing
 Trade Finance
3.2.5 Treasury
 FX transactions/deals
3.3 Board of Directors
Board of Share Holders Percentage
Ministry of Finance 97.193%
Afghan Red Crescent 1.791%
Pashtany Bank 0.980%
Afghan Air Force Command 0.032%
Kabul Municipality 0.004%
Total % of Shares 100%

28
3.4 Board of Management
Name: Post Title:
Mr. Ahmad Javed Wafa President/CEO
Mr. Muhibullah Amini Chief Finance Officer
Mr. Waheedullah Hakimi Chief Credit Officer/CCO
Mr. Zainullah Hassany Chief Operations Officer/COO
Mr. Fida Mohammad Chief Risk Officer
3.5 Board of Supervisor
Name: Post Title:
Mr. Abdul Malik Halimi Supervisor
Mr. Abdul Majeed Jabarkhail Supervisor
Mr. Khalid Zarif Supervisor
3.6 Business Objectives:
3.6.1 Vision
BMA will be dominant and leading bank in Afghanistan by providing modern products
and services to its valued customers by meeting customers and shareholders
expectation.
3.6.2 Mission
We have been with you since 1933 and will lead you in the future with excellent
customer’s services shareholders and employees value.

29
3.6.3 Core Values
 Ethics & integrity:
This is our cornerstone, we will operate with honesty, fairness and respect for all
stakeholders.
 Compliance:
We will always be complaint with laws, regulations and best international standards and
practices.
 Public Interest:
We will contribute to the development objectives of the country.
 Transparency And Efficiency:
We will ensure transparency and efficiency in our operations.
 Team Work:
We will promote culture of teamwork to make sure clients get the best possible service and
products.
 Leadership
We will promote the culture of leadership by example, the effective leadership demands
accountability courage and caring.
3.7 Bank-e-Millie Afghan Today
Bank-e- Millie Afghan (BMA) is a state owned bank in Afghanistan. It was the first financial
institution established in Afghanistan in 1933. It is currently enjoying its 84th
year of fame,
having recognition both inside and outside Afghanistan. Similarly, it was the first financial
institution established in a public private partnership set up with 72 percent share held by
private sector. Later in 1976, it was fully nationalized by the government of Islamic Republic
of Afghanistan.
As a first bank in the country, BMA introduced banking services to the people of Islamic
Republic of Afghanistan.
Since then, the banks competitive strength and ongoing market leadership philosophy lays in
its strong capital base, strict compliance measures and proven trustworthiness.
Currently BMA has 850 employees, 15 city branches in Kabul and 21 branches in provinces
of Afghanistan. The bank has equity investments in USA and UK, and 70 thousands of
customer base, the major portion of the customer base constitutes government entities,
ministries, embassies, NGOs, and armies. The rest are house hold individuals and
corporations i.e. Beverages, Manufacturing, Trading, Services, Airlines, Transportations,
Construction, Fuel, Steel, Medicines etc. The bank is equipped with all types of possibilities
and geared up to provide the best and the most modern banking services to its customers.
As a recognized and trusted bank for decades, BMA has a strong corporate governance
structure with shareholders General Assembly, Board of Supervisors (Boss) and Board of
Management.

31
CHAPTER FOUR
Ratio Analysis
4.1 Current Ratio:
An indication of a company's ability to meet short-term debt obligations; the higher the ratio,
the more liquid the company is. Current ratio is equal to current assets divided by current
liabilities. If the current assets of a company are more than twice the current liabilities, then
that company is generally considered to have good short-term financial strength. If current
liabilities exceed current assets, then the company may have problems meeting its short-
term obligations.
The ideal current ratio preferred by banks is 1.33: 1
CURRENT RATIO= CURRENT ASSETS/ CURRENT LIABILITY
years Current Assets
(AFN)
Current Liabilities
(AFN)
Current Ratio
2013 21,598,079,873 19,570,581,608 1.1035
2014 20,659,483,238 18,992,392,417 1.0877
2015 25,489,710,557 23,293,263,195 1.0942
2016 29,857,728,474 28,859,303,585 1.0345
1.1035 1.0877 1.0942
1.0345
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2013 2014 2015 2016
Ratio
years
Current Ratio of BMA bank for the periode
2013-2016
Current Ratio

32
Interpretation:
An ideal solvency ratio is 2. The ratio of 2 is considered as a safe margin of solvency due to
the fact that if current assets are reduced to half (i.e.) 1 instead of 2, then also the creditors
will be able to get their payments in full.
But here the current ratio is less than 2 and more than 1 which shows that the bank have
current assets just equal to the current liabilities which is not satisfactory as the safety
margin is very less or zero. Therefore the bank should keep more current assets so that it
can maintain a satisfactory safety margin.
4.2 Profitability Performance
In banking the risk-reward tradeoff is constantly present. Risk taking generates higher
expected earnings through various mechanisms. For example granting high margin loans to
risky customers may increase earnings in the short term but it also increases the credit risk
profile and the probability of future losses (KPMG, 1998). BMA is giving continued emphasis
on quality assets, which resulted in providing a sound asset base for the bank. So now we
are show BMA Return on asset ratio with a descriptive analysis last four financial years from
their balance sheet and income statement result.
4.2.1 Return on Assets Ratio (ROA)
ROA is a financial ratio that shows the percentage of profit a company earns in relation to its
overall resources. It is company defined as net income divided by total assets.
ROA answers the question: “what can you do with the assets that you have available?”
the higher the ROA the better the management.
This ratio establishes a relationship between total assets and sales. This ratio enables to
know the efficient utilization of total assets of a business.
Ideal ratio: 2 times
High ratio indicates efficient utilization and ratio less than 2 indicates underutilization.
Return on Assets (ROA) = net profit/total assets
years net profit
(AFN)
total assets
(AFN)
ROA %
2013 323,836,347 25,439,497,448 0.0127 1.27%
2014 (318,567,297) 24,455,528,181 -0.0130 -1.3%
2015 584,824,705 29,539,505,996 0.0197 1.97%
2016 3,321,595,375 37,769,821,819 0.0879 8.79%

33
Interpretation:
ROA 1.27% and -1.3% which is lower than last period. In 2014 the bank was in loss and I
think it was because of external environment that before 2014 there was rumors that the
economy of Afghanistan will down so every investors take their funds and invest it in foreign
countries. But in 2015 it is most good (fair) and near to 2% Bank performs most effectively in
2016 as I can mention from graph. But in last year there some hope that it will try to reach
previous position. If we focus on graph here two period means respectively 1.27% and -1.3%
which shown the downward trend for last period.
So current observations on ROA of BMA indicate they do not perform at satisfactory level.
This trend we can easily identify by above ROA graph of 2013-2016.
4.2.2 Return on Equity (ROE)
The return on equity ratio is a profitability ratio that measures the ability of a firm to generate
profits from its shareholders’ equity generates. So a return on 1 means that every dollar of
common stockholders’ equity generates 1 Afghani of net income. This is an important
measurement for potential investors because they want to see how efficiently a company will
use their money to generate net income. ROE is also an indicator of how effective
management is at using equity financing to fund operation and grow the company.
Return on Equity (ROE) = net profit/ total equity.
Years net profit
(AFN)
total equity
(AFN)
ROE %
2013 323,836,347 5,433,597,629 0.0595 6%
2014 (318,567,297) 5,117,640,216 -0.0622 -6%
2015 584,824,705 5,369,881,962 0.1089 11%
2016 3,321,595,375 8,583,595,452 0.3869 39%
0.0127
-0.013
0.0197
0.0879
-0.02
0
0.02
0.04
0.06
0.08
0.1
2013 2014 2015 2016
Ratio
Years
ROA RATIO OF BANK FOR THE PERIODE
2013-2016
Return on asset

34
Interpretation:
Return on equity measures a corporation’s profitability by revealing how much profit a
company generates with the money shareholders have invested. The average for ROE for
companies in the banking industries in the first half of 2017 was about 9.75% or 10%. So
according to this percentage BMA in two past years 2013 (6%) and 2014 (-6%) was in loss
and lower ROE. But in 2015 (11%) and 2016 (39%) bank performs excellent and I can say
that the bank current ROE position don’t need to change and keep it.
4.2.3 Net Interest Margin (NIM)
The NIM ratio measures the profit a company makes on its investing activities as a
percentage of total investing assets.
Banks and other financial institutions typically use this ratio to analyze their investment
decisions and track the profitability of their lending operations. This way they can adjust their
lending practices to maximize profitability.
Investment firms also use this margin to measure the success of a fund manager’s
investment decision-making. A positive percentage indicates that the fund manager made
good decision and was able to a profit on his investments. A negative ratio on the other
hand, means the fund manager lost money on his investment because the interest expenses
exceeded the investment earnings.
Net Interest Margin =
(interest income − interest expenses)
Total Assets
0.0595
-0.0622
0.1089
0.3869
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
2013 2014 2015 2016
Ratio
years
ROE Ratio of BMA bank for the periode
2013-2016
Return on Equity

35
years Interest Income
(AFN)
Interest Expenses
(AFN)
Total Assets NIM NIM
%
2013 563,512,735 60,604,796 25,439,497,448 0.019 2%
2014 826,141,299 100,136,464 24,455,528,181 0.029 3%
2015 938,419,671 133,754,763 29,539,505,996 0.027 3%
2016 992,046,626 131,203,584 37,769,821,819 0.022 2.2%
Interpretation:
The net margin measures how successful an investment manager or company is at making
investment decision or investing its resources. In the United States, the average net interest
margin for banks was 3.10% in the first quarter of 2017.
The BMA bank NIM was 2% in 2013, 3% in 2014 and 2015 and in 2016 it was 2.2% so in
average the Net Interest Margin for bank-e-Mille Afghan is 2.55% this mean that for every
100 AFN of invested assets (loans to bank customers) the bank made 2.5 AFN of income
after all interest expenses had been paid so the bank made good investment decision in this
period compare to American Banks and used its resources effectively to generate a 2.2
percent return.
4.3 Liquidity performance
Liquidity performance measures the ability to meet financial obligations as they become
due and is crucial to the sustained variability of banking institutions. Liquidity, or the amount
0.019
0.029
0.027
0.022
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
2013 2014 2015 2016
Ratio
Years
NIM Ratio of BMA bank for the periode
2013-2016
Net Interest Margin Poly. (Net Interest Margin)

36
of cash or cash-like assets in the balance sheet, is critical for any bank. Banks must meet
funding needs for their operations, they must be able to repay their own debts, and they
must have enough cash on hand to meet withdrawal requests, and fund new loans for
customers.
A lack of liquidity is the fastest path to failure for a bank, so investors should always pay very
close attention to bank liquidity position. Afghanistan banks rely on customer’s deposits and
their current balances with the Afghanistan bank for their liquidity.
4.3.1 Loans to deposit Ratio (LDR)
The loan-to-deposit ratio (LTD) is a commonly used statistic for assessing a bank’s liquidity
by dividing the bank’s total loans by its total deposits. This number is expressed as a
percentage. If the is too high, it means that the bank may not have enough liquidity to cover
any unforeseen fund requirements, and conversely, if the ratio is too low, the bank may not
be earning much as it could be.
Tradition and prudence indicate that the ideal LTD ratio is between 80 and 90%.where the
office of the comptroller of the currency (OCC), the board of governors of the federal reserve
system and the federal deposits insurance corporation (FDIC) do not set minimum or
maximum LTD ratios for banks
Loans to deposit Ratio (LDR) = Loans/total deposits
years Loans
(AFN)
total deposits
(AFN)
LDR %
2013 1,523,821,305 17,673,625,929 0.0862 9%
2014 2,225,138,519 18,771,766,522 0.1185 12%
2015 2,642,372,626 22,491,196,070 0.1174 12%
2016 2,662,578,675 27,760,008,878 0.0959 10%

37
Interpretation:
Above table exhibits Loan to deposit ratio of the bank during last 4 years. In the year 2013
ratio was 9% and it increase to 12% in the year 2014 and 2015 respectively. In the year
2016 ratio was decline to 10%. It leads to conclusion that loan performance of the bank is
not good compare to American banks and also ICICI Bank of India because the average of
loan to deposit ratio is between 80% and 90% so the current LDR of BMA is too low it mean
the bank may not be earning as much as it could be. The BMA bank must manage their
loans and change this situation.
4.3.2 Loans to total asset ratio (LTA)
The loan-to-assets ratio is another industry-specific metric that can help investors obtain a
complete analysis of bank’s operations. Banks that have a relatively higher loan-to-asset
ratio derive more of their income from loans and investment, while banks with lower levels of
loans-to-asset ratios derive a relatively larger portion of their total incomes from more-
diversified, noninterest-earning sources, such as asset management or trading. Banks with
lower loan-to-asset ratios may fare better when interest rates are low or credit is tight. They
may also fare better during economic downturns.
The loans to assets ratio measures the total loans outstanding as a percentage of total
assets. The higher this ratio indicates a bank is loaned up and its liquidity is low. The higher
the ratio, the more risky a bank may be to higher defaults.
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
2013 2014 2015 2016
Ratio
Years
LDR Ratio of BMA bank for the periode
2013-2016
Loans to Deposit Ratio Poly. (Loans to Deposit Ratio)

38
Loans to total asset ratio (LTA) = loans/total assets
years loans
(AFN)
total assets
(AFN)
LTA LTA
%
2013 1,523,821,305 25,439,497,448 0.0598 6%
2014 2,225,138,519 24,455,528,181 0.0908 9%
2015 2,642,372,626 29,539,505,996 0.0894 9%
2016 2,662,578,675 37,769,821,819 0.0704 7%
Interpretation:
As per definition of loans to total assets. Banks that have a relatively higher loan-to-asset
ratio derive more of their income from loans and investment, while banks with lower levels of
loans-to-asset ratios derive a relatively larger portion of their total incomes from more-
diversified, noninterest-earning sources, such as asset management or trading.
So in current data analysis over all the BMA bank’s loans to deposits is low compare to
American and Indian banks so the liquidity performance of Bank-e-Millie Afghan is high and
the bank can fare better when interest rates are low or credit is tight. And they may also fare
better during economic downturns.
0.0598
0.0908 0.0894
0.0704
0
0.02
0.04
0.06
0.08
0.1
2013 2014 2015 2016
Ratio
Years
LTA Ratio of BMA bank for the periode
2013-2016
loan to Total Asset Poly. (loan to Total Asset)

39
4.3.3 Debts to Total Assets Ratio (DTA)
The debt to asset ratio is a leverage ratio that measures the amount of total assets that are
financed by creditors instead of investors. In other words, it shows what percentage of
assets is founded by borrowing compared with the percentage of resources that founded by
the investors.
Analysts, investors, creditors and researchers use this measurement to evaluate the overall
risk of a company.
If debt to asset equals 1, it means the company has the same amount of liabilities as it has
assets. This company is highly leveraged. A company with a DTA of greater than 1 means
the company has more liabilities than assets. This company is extremely leveraged and
highly risky to invest in or lend to. A company with a DTA of less than 1 shows that it has
more assets than liabilities and could pay off its obligation by selling its assets if it needed to.
Debt to Asset Ratio =
Total Debt
Total Assets
years Total debt
(AFN)
total assets
(AFN)
DTA DTA
%
2013 17,673,625,929 25,439,497,448 0.6947 69%
2014 18,771,766,522 24,455,528,181 0.7675 76%
2015 22,491,196,070 29,539,505,996 0.7613 76%
2016 27,760,008,878 37,769,821,819 0.7349 73%
0.6947
0.7675 0.7613
0.7349
0.64
0.66
0.68
0.7
0.72
0.74
0.76
0.78
2013 2014 2015 2016
Ratio
Years
DTA Ratio of BMA bank for the periode
2013-2016
DTA Ratio Poly. (DTA Ratio)

40
Interpretation:
The average percentage of debt to asset ratio is 0.7396=73.96% it means that it is less than
1 or 100% so Bank-e-Millie Afghan has more assets than liabilities and could pay off its
obligation by selling its assets if it needed to.
4.3.4 Debt-to-Equity Ratio (DTE)
The debt to equity ratio shows the proportion of equity and debt a firm is using to finance its
assets, and the extent to which shareholder’s equity can fulfill obligation to creditors in the
event of a business decline. A low debt to equity ratio indicates lower risk, since debt holders
have less claim on the company’s assets. A higher debt to equity ratio, on the other hand,
shows that a company has been aggressive in financing its growth with debt, and there may
be a greater potential for financial distress if earnings do not exceed the cost of borrowed
funds.
Debt to Equity Ratio =
Total Liabilities
Total Equity
years Total liabilities
(AFN)
total equity
(AFN)
DTE DTE
%
2013 20,005,899,819 5,433,597,629 3.68 368%
2014 19,337,887,965 5,117,640,216 3.77 377%
2015 24,169,624,034 5,369,881,962 4.50 450%
2016 29,186,226,367 8,583,595,452 3.40 340%
3.68 3.77
4.5
3.4
0
1
2
3
4
5
2013 2014 2015 2016
Ratio
Years
DTE Ratio of BMA bank for the periode
2013-2016
Debt to Equity Poly. (Debt to Equity)

41
Interpretation:
The average debt to equity for retail and commercial U.S. banks, as of January 2015, is
approximately 2.2 for investment banks, the average debt to equity is higher, about 3.1
The average of debt to equity for Bank-e-Millie Afghan in period 2013-2016 is 3.8 it is more
than 2.2 and it is unfavorable because it means that the bank relies more on external lenders
thus it is at higher risk, so compare to U.S. banks it is high and BMA must manage their
debts and equity.
4.3.5 Equity multiplier Ratio
An equity multiplier measures a company’s financial leverage by using a ratio of the
company’s total assets to its stockholder’s equity.
Generally, a lower equity multiplier indicates a company has lower financial leverage. It is
better to have a low equity multiplier, because a company uses less debt to finance its
assets.
This ratio measures the total assets a company owns per dollar of its stockholders’ equity.
The equity multiplier of a company should only be used in comparison to the industry
standard or to companies in the same sector and industries.
Equity Multiplier Ratio =
Total Assets
Total Equity
Years Total assets
(AFN)
total equity
(AFN)
EM EM
%
2013 25,439,497,448 5,433,597,629 4.68 468%
2014 24,455,528,181 5,117,640,216 4.77 477%
2015 29,539,505,996 5,369,881,962 5.50 550%
2016 37,769,821,819 8,583,595,452 4.40 440%
4.68 4.77
5.5
4.4
0
1
2
3
4
5
6
2013 2014 2015 2016
Ratio
Years
EM Ratio of BMA bank for the periode
2013-2016
Equity Multiplier Poly. (Equity Multiplier)

42
Interpretation:
The equity multiplier is a ratio used to analyze a company’s debt and equity financing
strategy. A higher ratio means that more assets were funding by debt than by equity. In other
words investors funded fewer assets than by creditors.
It can be concluded that the Bank-e-Millie Afghan current equity multiplier is high and assets
are funded more debts and creditors than by equity and investors.
4.5 Current Cash Debt Coverage Ratio
Current Cash Debt Coverage Ratio is a liquidity ratio that measures the relationship between
net cash provided by operating activities and the average current liabilities of the company. It
indicates the ability of the business to pay its current liabilities from its operations.
Current Cash Debt Coverage Ratio =
Net cash provided by operating activities
Average current liabilities
years Operating profit
(AFN)
Average current
liabilities(AFN)
CCDCR CCDCR
%
2013 404,900,434 20,128,262,586.50 0.0201 2%
2014 369,260,973 19,281,487,012.50 0.0191 2%
2015 796,174,928 21,142,827,806.00 0.0376 4%
2016 4,113,307,744 26,076,283,390 0.1577 16%
0.0201 0.0191
0.0376
0.1577
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
2014 2015 2016 2017
Ratio
Years
CCDC Ratio of BMA bank for the periode
2013-2016
current cash debt coverage Poly. (current cash debt coverage )

43
Interpretation:
Analysts believe that if the amount of this ratio is greater than 40%, the bank should not be
having problems with liquidity. Since the current cash debt coverage ratio is less than 40% in
case of BMA bank, it can be concluded that the bank experienced problems with liquidity.
4.6 Interest Coverage Ratio
The interest coverage ratio is a financial ratio that measures a company’s ability to make
interest payments on its debt in a timely manner. It calculates the firm’s ability to afford the
interest on the debt. Creditors and investors use this ratio to understand the profitability and
risk of a company.
Interest Coverage Ratio =
EBIT(Earnings Before Interest & Taxes)
Interest Expences
years EBIT
(AFN)
Interest Expenses
(AFN)
ICR
2013 404,900,434 60,604,796 6.6
2014 (399,620,315) 100,136,464 -3.9
2015 725,970,971 133,754,763 5.4
2016 4,261,224,238 131,203,584 32.4
6.6
-3.9
5.4
32.4
-10
-5
0
5
10
15
20
25
30
35
2013 2014 2015 2016
Ratio
Years
IC Ratio of BMA bank for the periode
2013-2016
Interest Coverage Ratio Poly. (Interest Coverage Ratio)

44
Interpretation:
It is believed that an adequate amount of this ratio should be greater than 1. When the
amount of this ratio is less than 1, the problems with the payments of due liabilities for
interest and the need to obtain funds from external sources appear. In case, each dinar
intended for payment of liabilities for interest was greater. It is indicating that the bank did not
have any problems with the servicing of liabilities for interest.

45
CHAPTER FIVE
Findings, Suggestion & Conclusion
5.1 Major Findings:
I had selected this project that is on “Financial Ratio Analysis of BMA” to analyze the
financial position of Bank-e-Millie Afghan and its financial trends.
This thesis is completed on the basis of our personal visits, interviews with the staff and
analysis of financial statements and corporate reports of BMA. Basic emphasis is placed on
the financial data which has been correlated with the related information attained during my
visits and interviews.
The Financial Position of BMA is satisfactory compare to other commercial bank but has
some problems. There have also some problems in balance sheet others area. The
presentation of data can be summarized as of the following findings:
 Profit rate is low in recent years. (2013-2014) so to somebody it is unattractive.
 Profitability performance of BMA is satisfactory level because of last 2 years (2015-
2016) higher growth.
 Liquidity quit good compare to others but they have chance to improve more.
 Overall Financial performance effective if we compare to others bank because of last
few years unstable environment in our country.
 In case of import and export financing it takes long time to sanction the fund.
 Bank-e-Millie Afghan have their own websites which acts as an information center
and promotional tool for the banks.
 BMA has own banking software.
 Lack of available information on banking product.
 Internet Banking has been introduced. But most of the time the server is unavailable.
So overall performance would not been satisfactory level because they have improved
and steadily maintain the assets and income position. Share price also need to increase
with dividend for bank stakeholder.

46
5.2 Summary & CONCLUSION:
On the basis of various techniques and ratios applied for the financial analysis of Bank-e-
Millie Afghan we can arrive at a conclusion that the financial position and overall
performance of the bank is satisfactory. Though the income of the bank has increased over
the period but not in the same pace as of expenses. But the bank has succeeded in
maintaining a reasonable profitability position.
Equity shareholders are also enjoying an increasing trend in the return on their capital.
Though current assets and liabilities (current liquidity) of the bank is not so satisfactory but
bank has succeeded in maintaining a stable solvency position over the years. As far as the
ratio of external and internal equity is concerned, it is clear that bank has been using more
amount of external equity in the form of loans and borrowings than owner’s equity.
Bank’s investments are also showing an increasing trend. Due to increase in advances, the
interest received by the bank from such advances is proving to be the major source of
income for the bank.
Bank is a very important and vital for economic development in mobilizing capital and other
resources. BMA is also contributing to the advancement of the socioeconomic condition of
the country. To keep pace with the current market and demand, BMA is following several
strategies and taking new initiatives, offering new products and services to the customers.
The bank should maintain well-structured communication from upper level to lower level.
BMA have a strong position in the competitive market. It is among one of the fastest growing
Bank.

47
5.3 Suggestions and Recommendation:
 Although the short term liquidity position is quite satisfactory as per revealed by liquid
ratio but the current ratio is below the ideal ratio of 2:1.So the bank should make
efforts to increase its current assets to maintain a safety margin and to maintain a
better liquidity position.
 The profitability of the bank for the period under study is not satisfactory. Profits are
increasing but not with same pace as of the expenditure due to higher reliance on
debt capital in the form of borrowings and loans for financing capital structure.
So in order to improve profitability, the bank should reduce its dependence on
external equities for meeting capital requirements. Consequently, the interest
expenses will decline and profits will increase which is good for the bank.
 Though the bank has been successful in increasing its deposits but to further
improve upon such situation it can introduce some new and attractive schemes for
public. Such schemes can be in the form of higher rate of interest and shorter
maturity period for FD’s etc.
 Bank should try to finance more and more projects. Financing will help it to earn
higher amount of profits.
 The bank is having a greater reliance on debt capital. The increasing reliance on
external equities may prove hazardous in the long run. So in order to remedy this
situation bank should increase its focus on internal equities and other sources of
internal financing.
 Bank can also think for improving its day-to -day service to its clients. Such service
can be improved by providing prompt service and showing an attitude of co-operation
to its clients. It will help to give a kind of confidence to the public and build a better
public image.
 To achieve the objective of rural development it should open more and more
branches in different rural areas of the country. It will facilitate in providing help to
rural poor farmers and other living below the poverty line. Bank can appoint
commission agents for different area who can encourage general public to invest in
the capital of the bank and make more deposits in BMA Bank.
 Last but not least, bank should adopt branch automation experiment to control the
operational cost.

48
5.4 Statements of Financial Position
note 2013 2014 2015 2016
4 19,692,283,052 17,822,201,153 22,228,543,350 26,465,421,568
5 1,523,821,305 2,225,138,519 2,642,372,626 2,662,578,675
6 381,975,516 612,143,566 618,794,581 729,728,231
7 1,279,465,178 1,274,832,580 1,275,535,589 1,184,860,019
8 3,309,789 1,338,417 40,173,172 31,352,141
9 645,683,089 645,683,089 645,683,089 4,082,521,861
10 1,912,959,519 1,874,190,857 2,088,403,589 2,613,359,324
25,439,497,448 24,455,528,181 29,539,505,996 37,769,821,819
11 17,673,625,929 18,771,766,522 22,491,196,070 27,760,008,878
12 101,073,587 80,602,680 155,446,448 216,504,883
13 295,882,092 140,023,215 146,620,677 882,789,824
14 1,500,000,000 - 500,000,000 -
15 435,318,211 345,495,548 876,360,839 326,922,782
20,005,899,819 19,337,887,965 24,169,624,034 29,186,226,367
16 1,000,000,000 1,000,000,000 1,000,000,000 1,000,000,000
3,496,242,142 3,181,158,514 3,392,013,299 6,716,015,909
17 914,278,001 914,278,001 914,278,001 845,612,174
23,077,486 22,203,701 63,590,662 21,967,369
5,433,597,629 5,117,640,216 5,369,881,962 8,583,595,452
25,439,497,448 24,455,528,181 29,539,505,996 37,769,821,819
otherassets
balncesheet
Assets:
cashandbankbalance
Data(AFN)
TotalAssets:
LoansandAdvancestoCustomers
investments
propertyandequipments
intangibleassets
investmentproperty
Totalequity:
Totalliabilitiesandequity
Otherliabilities
TotalLiabilities:
Equity
Sharecapital
Retainedearnings
Surplusonrevaluationofpropertyandequipment-net
Exchangetransalationreserve
Liabilities:
Depositesfrombanksandcustomers
Ceurrenttaxliabilities
Defferedtaxliability-net
Shorttermborrowing

Financial Ratio Analysis of Bank-e-Millie Afghan 2013-2016

Financial Ratio Analysis of Bank-e-Millie Afghan 2013-2016

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