Financial ratios analysis and Profitability Ratios in the Banking Sector

Profitability ratios are the most of import ratios to investors in any given industry, because it merely shows how much net income the company has earned over old ages, does it accomplish satisfactory degree to investors, Bankss, and stockholders compared to that of its rival or the industry. Besides by boring down into figures, profitableness ratios can besides state how efficient and effectual company conducts its concern resources and operation activities such as gross revenues, production or other cost-consumed 1s.

This subdivision will analyze the grounds why the profitableness of GWB is turning upward contrary to that of HB through old ages, why even bring forthing big gross revenues in 2008 ( ever twice every bit much as HB ‘s for 3 old ages ) GWB merely achieved really low net income ( 2,552 ) , about one 4th to HB ‘s ( 9.386 ) in 2008 and how of import cost direction can better the profitableness of GWB on one side but cut down HB ‘s on the other side in 2009 and 2010.

Now, this study is to analyse the profitableness of the two companies by looking into its ROCE, and its relationship between ROS and AT and Net Net income Margin ratios:

Tax return on Capital Employed:

Tax return on Capital Employed ( ROCE ) is the cardinal profitableness ratio that measures company ‘s net incomes and concern public presentation. It shows the relationship between the PBIT with the capital employed to do that net income.

Graphs to compare profitableness between GWB and HB for 3 old ages from 2008 to 2010: ROCE, ROS and AT

Describe:

As seen in the graph:

The ROCE of GWG is upward, and that of HB nevertheless is downward for the 3 fiscal old ages.

Both AT of GWG and HB are somewhat downward, nevertheless the ratio of GWG ( averagely 2.33 ) is at higher degree than that of HB ( averagely 1.56 )

While ROS of GWG started at really low rate 2.31 % in 2008 compared to the ratio of HB 16.85 % but GWG has improved dramatically to 7.11 % in 2009 and 12.68 % in 2010 since HB dropped well to 11.21 % in 2009 and 9.27 % in 2010.

Analyze:

Since ROCE is equal by AT times ROS, and AT of both companies seems to remain unchanged, the important alterations in ROCE between them mostly depends on the fluctuations of their ROS ratios

Actually, a important addition in ROCE of GWG is as a consequence of an addition in its ROS and a important lessening in ROCE of HB is as a consequence of a lessening in its ROS

Besides, the norm AT of GWG for 3 old ages is 1.5 times every bit much as that of HB means the greater effectivity of utilizing its assets to bring forth grosss for GWG over HB.

Once once more, because ROS is equal by PBIT/ Gross saless, and the Gross saless of both companies somewhat increase in about same proportion ( around 1.15 times by both over 3 old ages ) , the important alterations in ROS between them mostly depends on the fluctuations of their PBIT.

PBIT of GWG has soared dramatically from really low degree 2.552 in 2008 to 8.933 in 2009 and 16.045, while a downward tendency has been seen in HB ‘s from 9.386 in 2008 to 6.899 in 2009 and 6.004 in 2010. Here is the cardinal point to analyse why they have achieved different public presentations.

Even bring forthing big gross revenues in 2008 ( ever twice every bit much as HB ‘s for 3 old ages ) GWB merely achieved really low net income ( 2,552 ) about one 4th to HB ‘s in 2008.

GWG

2010

2009

2008

Gross saless

126,511

125,706

110,345

addition

115 %

114 %

100 %

Hemoglobin

Gross saless

64,736

61,569

55,692

addition

116 %

111 %

100 %

Net income is hence measured as the difference between Gross saless and Operation Expenses. Operation Expenses and COGS are the cardinal grounds for two companies ‘ public presentation differences:

GWG

2010

2009

2008

OE

110,466

116,773

107,793

lessening

102.48 %

108.33 %

100.00 %

Hemoglobin

OE

58,732

54,670

46,306

addition

126.83 %

118.06 %

100.00 %

Remark:

There are two rearward images of concern public presentation between the two companies: GWB has improved increasingly, HB has non.

GWG must make something right in its cost schemes from 2008 to 2009 and 2010 and frailty versa for HB.

To simplify, the grounds of positive alterations for GWB ‘s profitableness and negative alterations for HB ‘s are largely illustrated by the diagram below:

Diagram illustrated the fiscal ratio factors that make the positive addition in profitableness of GWG over 3 old ages.

– The efficient manner of cost direction in GWB through 3 old ages has lead the decrease of its COGs and Operation Expenses, along with the somewhat addition in gross revenues which together consequences in the addition in ROS, ROCE ratios and eventually the profitableness.

– By the same manner, the inefficient manner of cost direction in HB has made it less profitableness public presentation than it did in old old ages.

GWG

2010

2009

2008

Cog

30,683

35,919

32,896

Decrease

93.27 %

109.19 %

100.00 %

Hemoglobin

Cog

32,636

32,168

26,297

Addition

124.11 %

122.33 %

100.00 %

GWG

2010

2009

2008

Gross saless

126,511

125,706

110,345

addition

115 %

114 %

100 %

Hemoglobin

Gross saless

64,736

61,569

55,692

addition

116 %

111 %

100 %

Net net income Margin ( NPM ) measures the net income before involvement and revenue enhancement PBIT made out of entire gross revenues of the company. It besides shows the similar modesty tendencies between the two companies.

To sum up:

By all the analysis of past public presentation and comparing, GWB has performed more productively and expeditiously than HB has. GWB has successfully reduced its production cost every bit good as maintained its high grosss to bring forth better concern public presentation and profitableness over old ages.

2. Liquidity ratios:

Liquidity ratios merely mensurate how companies can run into its current fiscal duties in term of hard currency or how can assets be rapidly transferred into hard currency when needed.

With that position, current ratio indicates the relationship between company ‘s entire current assets and its entire current liabilities, and how it can pay short term debts ( less than 12 months ) from the current assets which are largely able to transform into hard currency. The higher is the ratio, the better. Below 1:1 is extremely non expected and the ideal figure for this ratio is 2:1.

Both of these companies have achieved the ratios above 1:1 nevertheless, the tendencies between them are different.

GWB has consistent uptrend, get downing at low degree ( comparative to HB ) 1.4 in 2008, but lifting reasonably to 1.74 in 2009 and 2.04 in 2010.

HB has fluctuated from high degree ( comparative to GWB ) 1.87 in 2008, but worsening well to 1.48 in 2009, and retrieving dramatically at 2.11 in 2010.

Liquid ratios have shown the similar tendencies to the old ratios between two companies because it is current ratio but deducts stock list plus which is non ever easy to turn into hard currency. As a affair of fact, excepting stock list makes liquid ratios of GWB go comparatively higher than those of HB, which means GWB has done better in term of stock list schemes over HB. GWB ‘s stock list has been kept as a consistent degree over 3 old ages around 10.300 accompanied with the addition in entire assets which makes the comparative proportion between stock list and entire plus acquiring smaller hence higher liquid ratio.

While HB ‘s stock list has been fluctuated ( 11.890 in 2008, 14.368 in 2009, 12.273 in 2010 ) and by the same manner eventually makes that proportion become bigger and therefore lower liquid ratio.

Hemoglobin

2010

2009

2008

Inventory

12,273

14,368

11,890

Current Asset

35,487

28,038

23,681

Proportion

34.58 %

51.24 %

50.21 %

GWB

2010

2009

2008

Inventory

10,138

10,678

10,392

Current Asset

37,571

31,234

29,320

Proportion

26.98 %

34.19 %

35.44 %

Proportion of stock list over entire current assets for GWB and HB over 3 old ages

The different image has been seen in Cash ratio when GWB has a much higher ability to pay its short term loans in immediate hard currency than HB. This implies greater hazards for HB in the concern when it needs hard currency to cover other operational disbursals

3. Efficiency ratios:

Efficiency ratios evaluate the ability of a company to use and pull off assorted resources. In the old subdivision, AT has been assessed to see how GWB utilize its assets more expeditiously to bring forth grosss than HB.

Specifically, Fixed Assets Turnover measures how expeditiously a company uses its fixed assets to bring forth its gross revenues. The higher is the ratio, the better. The high ratio means the company has less money tied up in fixed assets for each lb generated and the worsening ratio indicates that company has over invested in fixed assets such as works, machinery, ect…

In the chart, the increasing ratios of GWB for 3 old ages clearly show the efficient use of its fixed assets: 2.89 in 2008, 3.23 in 2009 and 3.31 in 2010. On the contrary, HB has the worsening and lower ratios over 3 old ages: 2.68 in 2008, 2.06 in 2009, 2.25 in 2010.

HB has performed less expeditiously utilizing fixed assets to bring forth gross revenues than GWB.

Stock turnover period steps for how long stock lists are being hold or how good a company can pull off its stock degree. The lower period is the ratio, the better ; it can assist company better its gross revenues and liquidness. Once once more, as analyzed in the profitableness ratios, GWB has performed better than HB in term of stock list and COGSs. GWB keeps its consistent lower stock list degree while cut downing cost of goods sold to maximise its net incomes.

In the chart, nevertheless in 2010, the period of GWB is acquiring higher to 121 yearss, compared to the old old ages: 109 yearss in 2009 and 113 yearss in 2008, while HB has reduced this period over 3 old ages: from 166 yearss in 2008, to 164 yearss in 2009 and 138 yearss in 2010.

Debtors period and creditors period

Debtors Period is one of most of import ratios reflected the ability of a company to roll up debts from its recognition clients. If the period is high, a company will confront trouble to rapidly retreat its finance to put in its concern operations. It can be seen that GWB ‘s period is much better ( 2.5 times lower ) than HB ‘s, while GWB merely needs averagely 30 yearss to take its debts back and this periods tend to diminish, HB usually needs more than 70 yearss and this ratios seem non to positively alter.

Creditors period, on the other manus, steps for how long company have to pay for its providers. The higher period is the ratio, the better because it can maintain hard currency longer and force the finance hazard to its providers. GWB ‘s period is still better and 1.6 times longer than HB ‘s for the 3 old ages, means the force per unit area of GWB to pay money back to its provider is smaller than the other.

4. Capital geartrain:

Capital pitching ratio determines how good a company can pay for its long term loans. It measures the proportion of long term loans over entire capital employed. Two reversed tendencies have been seen for the two companies. GWB started at really high rate of 32.21 % in 2008 but dropped to 22.98 % in 2009 and dipped to the lowest 0 % in 2010, conversely the other started at really low rate of 0.44 % in 2008, but climbed aggressively to 18.40 % in 2009 and 22.22 % in 2010. High ratio besides indicates the higher hazard of HB to pay high involvements to Bankss and the bigger jitteriness of its creditors.

5. Investing ratios:

This is the most of import ratio for the investors and it consists of many ratios which are traveling to see in item: EPS, DPS, PE

( Data taken from 5 fiscal twelvemonth sum-up of GWB and HB )

EPS represents the earning of the company as a map of the entire figure of ordinary portions in issue. ( O’Regan 2006:295 ) .The stockholders are interested in EPS as it shows the net incomes output per centum and to gauge hereafter growing which will impact the hereafter portion monetary value ( Elliott, 2008 ) . The two contrary tendencies in investing image have been matched with the same old tendencies described in profitableness ratios. GWB ‘s EPS has been improved well as the company generates better net incomes than it did in old twelvemonth. It reaches the highest point 48.4 ( p/ portion ) in 2010, followed by 17.6 in 2009 and -2.4 in 2008, a dramatic tendency for investors to look at. Conversely, less profitableness, therefore less EPS makes HB free its attraction from investors by the downtrend: 9.76 in 2010, 11.17 in 2009 and 16.15 in 2008.

The Price/earnings ratio is one of the most of import steps of the company ‘s public presentation ( O’Regan 2006:298 ) . It represents the market ‘s position of growing potency of the company, its dividend policy and the grade of hazard involved in investing. This measures the relationship between the net incomes of the company and its stock market monetary value. The low P/E means the company is undervalued and frailty versa, hence investors might set their money on those stocks instead than those which more than its worth ( overvalued ) . The P/E of GWB and HB are comparatively 8.3 and 15.43 agencies GWB and HB investors will pay comparatively 8.3 lbs and 15.43 lbs for every 1 lb of its net incomes, which means that HB ‘s stock is less attractive than the other by investors. The upward tendency of HB ( 6.19 in 2008, 13.43 in 2009 and 15.43 in 2010 ) shows its less attraction than GWB ( 120.58 in 2008, 14.54 in 2009 and 8.83 in 2010 ) . However … HB ( high P/E ) has more market assurance than GWB ( low P/E ) ? ? ?

Need to clear up this! ! !

Another cardinal investing ratio is really utile for investors to see is DPS ( Dividend per portion ) . It indicates how much dividend a company pays for its stockholders every twelvemonth or a one-fourth of a twelvemonth. As seen in the graph, there were no dividend paid to GWB ‘s stockholders in 2008 and 2009 but a really big dividend proposed 25 ( pence/share ) in 2010 while there were lower dividends paid to HB ‘s stockholders for 3 old ages: 8.52 in 2008, 2.7 in 2009 and 5.04 in 2010.