ASSIGNMENT

ON -ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Between
EASTERN BANK LTD. & TRUST BANK LTD.

Guided By: Mohammed Sohail Mustafa Lecturer of Finance Northern University Bangladesh

Submitted By: A.R.M.FAISAL BIN AZAM ID: MBA120103299

NORTHERN UNIVERSITY BANGLADESH

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Introduction
Financial analysis is a tool of financial management. It consists of the evaluation of the financial condition and operating performance of a business firm, an industry, or even the economy, and the forecasting of its future condition and performance. It is, in other words, a means for examining risk and expected return. Data for financial analysis may come from other areas within the firm, such as marketing and production departments, from the firms own accounting data, or from financial information vendors such as Bloomberg Financial Markets, Moodys Investors Service, Standard & Poors Corporation, Fitch Ratings, and Value Line, as well as from government publications, such as the Federal Reserve Bulletin. Financial publications such as Business Week, Forbes, Fortune, and the Wall Street Journal also publish financial data (concerning individual firms) and economic data (concerning industries, markets, and economies), much of which is now also available on the Internet. Within the firm, financial analysis may be used not only to evaluate the performance of the firm, but also its divisions or departments and its product lines. Analyses may be performed both periodically and as needed, not only to ensure informed investing and financing decisions, but also as an aid in implementing personnel policies and rewards systems. Outside the firm, financial analysis may be used to determine the creditworthiness of a new customer, to evaluate the ability of a supplier to hold to the conditions of a long-term contract, and to evaluate the market performance of competitors.

Who uses these analyses?

Financial statements are used and analyzed by a different group of parties, these groups consists of people both inside and outside a business. Generally, these users are: A. Internal Users: are owners, managers, employees and other parties who are directly connected with a company: 1. Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with more detailed information. These statements are also used as part of management's report to its stockholders, and it form part of the Annual Report of the company. 2. Employees also need these reports in making collective bargaining agreements with the management, in the case of labour unions or for individuals in discussing their compensation, promotion and rankings.

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

B. External Users: are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for numbers of reasons. 1. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions. 2. Financial institutions (banks and other lending companies) use them to decide whether to give a company with fresh loans or extend debt securities (such as a long- term bank loan ). 3. Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and duties paid by a company. 4. Media and the general public are also interested in financial statements of some companies for a variety of reasons.

FINANCIAL RATIO ANALYSIS

Ratio analysis is such a significant technique for financial analysis. It indicates relation of two mathematical expressions and the relationship between two or more things. Financial ratio is a ratio of selected values on an enterprise's financial statement. There are many standard ratios used to evaluate the overall financial condition of a corporation or other organization. Financial ratios are used by managers within a firm, by current and potential stockholders of a firm, and by a firms creditor. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. Values used in calculating financial ratios are taken from balance sheet, income statement and the cash flow of company, besides Ratios are always expressed as a decimal values, such as 0.10, or the equivalent percent value, such as 10%.

Essence of ratio analysis:

Financial ratio analysis helps us to understand how profitable a business is, if it has enough money to pay debts and we can even tell whether its shareholders could be happy or not. Financial ratios allow for comparisons: 1. between companies 2. between industries 3. between different time periods for one company 4. between a single company and its industry average To evaluate the performance of one firm, its current ratios will be compared with its past ratios. When financial ratios over a period of time are compared, it is called time series or trend analysis. It gives an indication of changes and reflects whether the firms financial performance
-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

has improved or deteriorated or remained the same over that period of time. It is not the simply changes that has to be determined, but more importantly it must be recognized that why those ratios have changed. Because those changes might be result of changes in the accounting polices without material change in the firms performances. Another method is to compare ratios of one firm with another firm in the same industry at the same point in time. This comparison is known as the cross sectional analysis. It might be more useful to select some competitors which have similar operations and compare their ratios with the firms. This comparison shows the relative financial position and performance of the firm. Since it is so easy to find the financial statements of similar firms through publications or Medias this type of analysis can be performed so easily. To determine the financial condition and performance of a firm, its ratios may be compared with average ratios of the industry to which the firm belongs. This method is known as the industry analysis that helps to ascertain the financial standing and capability of the firm in the industry to which it belongs. Industry ratios are important standards in view of the fact that each industry has its own characteristics, which influence the financial and operating relationships. But there are certain practical difficulties for this method. First finding average ratios for the industries is such a headache and difficult. Second, industries include companies of weak and strong so the averages include them also. Sometimes spread may be so wide that the average may be little utility. Third, the average may be meaningless and the comparison not possible if the firms with in the same industry widely differ in their accounting policies and practices. However if it can be standardized and extremely strong and extremely weak firms be eliminated then the industry ratios will be very useful.

What does ratio analysis tell us?

After such a discussion and mentioning that these ratios are one of the most important tools that is used in finance and that almost every business does and calculate these ratios, it is logical to express that how come these calculations are of so importance. What are the points that those ratios put light on them? And how can these numbers help us in performing the task of management? The answer to these questions is: We can use ratio analysis to tell us whether the business 1. is profitable 2. has enough money to pay its bills and debts 3. could be paying its employees higher wages, remuneration or so on 4. is able to pay its taxes 5. is using its assets efficiently or not 6. has a gearing problem or everything is fine 7. is a candidate for being bought by another company or investor But as it is obvious there are many different aspects that these ratios can demonstrate. So for using them first we have to decide what we want to know, then we can decide which ratios we need and then we must begin to calculate them.
-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Which Ratio for whom:

As before mentioned there are varieties of people interested to know and read these information and analyses, however different people for different needs. And it is because each of these groups have different type of questions that could be answered by a specific number and ratio. Therefore we can say there are different ratios for different groups, these groups with the ratio that suits them is listed below: 1. Investors: These are people who already have shares in the business or they are willing to be part of it. So they need to determine whether they should buy shares in the business, hold on to the shares they already have or sell the shares they already own. They also want to assess the ability of the business to pay dividends. As a result the Return on Capital Employed Ratio is the one for this group. 2. Lenders: This group consists of people who have given loans to the company so they want to be sure that their loans and also the interests will be paid and on the due time. Gearing Ratios will suit this group. 3. Managers: Managers might need segmental and total information to see how they fit into the overall picture of the company which they are ruling. And Profitability Ratios can show them what they need to know. 4. Employees: The employees are always concerned about the ability of the business to provide remuneration, retirement benefits and employment opportunities for them, therefore these information must be find out from the stability and profitability of their employers who are responsible to provide the employees their need. Return on Capital Employed Ratio is the measurement that can help them. 5. Suppliers and other trade creditors: Businesses supplying goods and materials to other businesses will definitely read their accounts to see that they don't have problems, after all, any supplier wants to know if his customers are going to pay them back and they will study the Liquidity Ratio of the companies. 6. Customers: are interested to know the Profitability Ratio of the business with which they are going to have a long term involvement and are dependent on the continuance of presence of that. 7. Governments and their agencies: are concerned with the allocation of resources and, the activities of businesses. To regulate the activities of them, determine taxation policies and as the basis for national income and similar statistics, they calculate the Profitability Ratio of businesses.

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

8. Local community: Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area so they are interested in lots of ratios. 9. Financial analysts: they need to know various matters, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on. therefore they are interested in possibly all the ratios. 10. Researchers: researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements depending on their nature of research.

CLASSIFICATION OF RATIOS
In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company's situation and the trends that are developing. A ratio gains utility by comparison to other data and standards. Financial ratios quantify many aspects of a business and are an integral part of financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Although these categories are not fixed in all over the world however there are almost the same, just with different names: 1. Profitability ratios which use margin analysis and show the return on sales and capital employed. 2. Rate of Return Ratio (ROR) or Overall Profitability Ratio : The rate of return ratios are thought to be the most important ratios by some accountants and analysts. One reason why the rate of return ratios is so important is that they are the ratios that we use to tell if the managing director is doing their job properly. 3. Liquidity ratios measure the availability of cash to pay debt, which give a picture of a company's short term financial situation. 4. Solvency or Gearing ratios measures the percentage of capital employed that is financed by debt and long term finance. The higher the gearing, the higher the dependence on borrowing and long term financing. The lower the gearing ratio, the higher the dependence on equity financing. Traditionally, the higher the level of gearing, the higher the level of financial risk due to the increase volatility of profits. It should be noted that the term Leverage is used in some texts. 5. Turn over Ratios or activity group ratios indicate efficiency of organization to various kinds of assets by converting them to the form of sales. 6. Investors ratios usually interested by investors.
-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

FINANCIAL OVERVIEW OF EASTERN BANK LTD.

BALANCE SHEET As on December 31, 2011.
Particulars BDT Million BDT Million

Eastern Bank Ltd.

Assets
Cash Balances with others institutions Money at call and short notice Investments Loans Total Assets: Total Fixed Assets: Other Assets Non Banking Assets Total Assets: Liabilities & Shoulders Equity Current Liabilities Long-term Liabilities Other Liabilities Total Liabilities 103170 Paid up Capital Statutory Reserve Total reserve Foreign Currency Translation Gain Retained Earnings Total Shareholders Equity 4527 3551 4576 15 1735 14407 21650 75535 5985 1991 247 117577 6022 3531 2650 16910 81773 110886 4453

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Total Liabilities & Shareholders Equity

117577

Eastern Bank Ltd.

SUMMARISED P&L ACCOUNT For the year ended 31 December 2011.
Particulars Net Interest Income Total Operating Income Total Operating Expenses Net Operating Income Total Provisions Profit Before tax Provision For Tax Deferred tax Income Net Profit After Tax Statutory Reserve Retained Earnings No. of Ordinary Share Earnings Per Share 452 Million(Not in BDT) 5.57 (825) 1696 (1739) 131 2521 978 4129 3314 7791 2685 5107 BDT TAKA BDT TAKA

Trust Bank Ltd

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Balance Sheet As on Dec 2011

Particulars

BDT Million

BDT Million

Assets
Cash Balances with others institutions Money at call and short notice Investments Loans Total Assets: Total Fixed Assets: Other Assets Total Assets: Liabilities & Shareholders Equity Current Liabilities Long-Term Liabilities Other Liabilities Total Liabilities Paid up Capital Statutory Reserve Other reserve Retained Earnings Total Shareholders Equity Total Liabilities & Shoulders Equity 2661 1827 4 1034 5526 76214 4350 76214 5699 3847 1440 9654 50801 71441 421

2344 65819 2525 70688

Trust Bank Ltd Summarized P&L Account For the year ended 31 December 2011
-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Particulars Net Interest Income Total Operating Income Total Operating Expenses Net Operating Income Total Provisions Profit Before tax Provision For Tax Net Profit After Tax Statutory Reserve Retained Earnings (260) (687) 256 885

BDT TAKA

BDT TAKA

3060 1500 1560

1304

617

357 No. of Ordinary Share Earnings Per Share 266 Million(Not in BDT) 2.32

RATIOS OF Eastern Bank Ltd. & Trust Bank Ltd.

LIQUIDITY RATIOS:
-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

The two liquidity ratios, the current ratio and the acid test ratio, are the most important ratios in almost the whole of ratio analysis and they are also the simplest to use. Liquidity ratios provide information about a firms ability to meet its short- term financial obligations. They are of particular interest to those extending short term credit to the firm. Two frequently-used liquidity ratios are current and quick ratio. While liquidity ratios are most helpful for short-term creditors/suppliers and bankers, they are also important to financial managers who must meet obligations to suppliers of credit and various government agencies. A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. A complete liquidity ratio analysis can help uncover weaknesses in the financial position of the business. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover shortterm debts.

1. CURRENT RATIO:
Current Assets Current Ratio= ----------------------Current Liabilities EBL Current Assets Current Liability Current Ratio 29113 21650 1.34 BDT IN MILLION TBL 5699 2344 2.43

Comments: The ratio is mainly used to give an idea of the companys ability to pay back its shortterm liabilities with its short-term assets. The higher the current ratio, the more capable the company is of paying its obligations. As we know that a ratio of 2:1 is considered safe, we can say that the financial position of Trust bank is more better than Eastern bank .The low current ratio does not mean that the firm will go bankrupt, but it is definitely is not a good sign for Eastern bank. Short term creditors prefer a high current ratio since it reduce their risk. 2. Quick or Acid-Test Ratio

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

The essence of this ratio is a test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. So it is the backing available to liabilities that must be paid almost immediately. There are two terms of liquid asset and current liabilities in this formula, Liquid asset is all current assets except the inventories and prepaid expenses, because prepaid expenses cannot be converted to cash. The Current liabilities include all current liabilities except bank overdraft and cash credit since they are not required to be paid off immediately. Quick Assets Acid test or Quick Ratio= ----------------------Current Liabilities EBL Quick Assets Current Liability Quick Ratio 25582 21650 1.18 BDT IN MILLION TBL 4350 2344 1.85

Comments: The acid-test ratio is far more forceful than the current ratio, primarily because the current ratio includes inventory assets which might not be able to turn to cash immediately. Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the current ratio, it means current assets are highly dependent on inventory.

Capital Structure Ratios:

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

1. Debt Equity ratio: This ratio reflects the relative claims of creditors and share holders against the assets of the firm, debt equity ratios establishment relationship between borrowed funds and owner capital to measure the long term financial solvency of the firm. The ratio indicates the relative proportions of debt and equity in financing the assets of the firm. Long-Term Debt Debt Equity Ratio= ----------------------------Shareholders Equity EBL Long-Term Debt Shareholders Equity Debt Equity Ratio 13181 14407 0.91 BDT IN MILLION TBL 6589 5526 1.19

Comments: In this ratio shareholders fund is the share capital plus reserve and surpluses. In case of high debt equity it would be obvious that the investment of creditors is more than owners. And if it is so high then it brings the firm in a risky position. Or if it is too low it might indicate that the organization has not utilized its capacity of borrowing which must be utilized and that is because the borrowing from outsiders is a good source of fund for business with lower returns in compare to equity. The Trust Bank Ltd. is trying to lower its debt equity ratio by lowering its liabilities and increasing its equity. And The Eastern Bank Ltd. is trying to higher its debt equity ratio by increasing its liabilities and increasing its equity.

2. Debt to Total Capital Ratio:

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

It is primarily the ratio between the Total Shareholders Equity and total assets. It indicates the relationship between owners fund and total assets. And shows the extent to which the owners funds are sunk in assets or different kinds of it. Total Shareholders Equity Debt to total Capital Ratio= ----------------------------------Total Assets EBL Total Shareholders Equity Total Assets Debt to total Capital Ratio 14407 110885 0.01 BDT IN MILLION TBL 5526 76214 0.07

Comments: This ratio indicates the proportion of proprietors funds used for financing the total assets. As a very rough measure, it is suggested that 2/3rd to 3/4th of the total assets should be financed through borrowings. A high ratio will indicate high financial strength but a very high ratio will indicate that the firm is not using external funds adequately.

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RETURN ON ASSETS:
This ratio actually measures the profitability of the investments in the firm.

Net Profit after Taxes Return on Assets (ROA) = -----------------------------------*100 Total Assets EBL Net profit after taxes Total Assets Return on Assets 2521 110885 2.27 BDT IN MILLION TBL 617 76214 0.8

Comments: It Measures the profitability of the total funds per investment of a firm.

RETURN ON CAPITAL EMPLOYED:

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

This Ratio is considered to be very important. It indicates the percentage of net profits before interest and tax to total capital employed. It reflects the overall efficiency with which capital is used. The ratio of a particular business should be compared with other business firms in the same industry to find out the exact position of the business.

Net Profit after Taxes RETURN ON CAPITAL EMPLOYED = ---------------------------------------*100 Total Capital Employed BDT IN MILLION TBL 617 2661 23.18

EBL Net profit after taxes Total Capital Employed Return on Capital Employed 2521 4527 55.7

Comments:
A measure of the return that a company is realizing from its capital employed. The ratio can also be seen as representing the efficiency with which capital is being utilized to generate revenue. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. Of course the higher the ratio, the better will be the profitability of the company.

RETURN ON TOTAL SHAREHOLDER EQUITY:

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

This ratio also known as return on shareholdersfunds or return on proprietorsfunds or return on net worth, indicates the percentage of net profit available for equity shareholders to equity shareholdersfunds and not on total capital employed. Net Profit after Taxes Return on shareholder equity = ---------------------------------------*100 Total shareholder equity

EBL Net profit after taxes Total shareholder equity 2521 14407 17.5 Return on shareholder equity

BDT IN MILLION TBL 617 5526 11.17

Comments: This ratio indicates the productivity of the owned funds employed in the firm. However, in judging the profitability of a firm, it should not be overlooked that during inflationary periods, the ratio may show an upward trend because the numerator of the ratio represents current values whereas denominator represents historical values.

INVESTORS RATIOS

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

EARNINGS PER SHARE:

EPS measures the profit earned per share. The higher EPS will attract more investors to acquire shares in the company as it indicates that the business is more profitable enough to pay the dividends in time. So it is of utmost importance to investors in order to decide the prospects.

Net Profit of Equity Holders Earnings per Share = ---------------------------------------Number of Ordinary Share BDT IN MILLION TBL 617 266 2.32

EBL Net Profit of Equity Holders Number of Ordinary Share Earnings per Share 2521 452 5.57

Comments: As mentioned above, EPS is one of the important criteria for measuring the performance of a company. If EPS increases, the possibility of a higher dividend per share also increases. However, the dividend payment depends on the policy of the company. Market price of shares of a company may also show an upward trend if the EPS is showing a rising trend. However, it should be remembered that EPS of different companies may vary from company to company due to the following different practices by different companies regarding stock in trade, depreciation, source of rising finance, tax-planning measures etc.

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Basic Earning Power (BEP):

EBIT Basic Earning Power (BEP) = ------------------Total Assets BDT IN MILLION TBL 3060 71441 4.28%

EBL EBIT Total Assets Basic Earning Power 5107 117577 4.34%

Comments: BEP removes the effect of taxes and financial leverage and is useful for comparison. Here we can see that both the bank almost in the same situation.

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Coverage Ratios
Interest Coverage:

EBIT Interest Coverage = ------------------Interest

BDT IN MILLION

EBL EBIT Interest Interest Coverage 5107 978 5.22

TBL 1560 256 6.09

Comments: It is a ratio that can used to determine how easily a company can pay the outstanding debt. A ratio of more than 1.5 is satisfactory. Here we can see that both of the banks interest coverage ratios are more than 1.5. So we can say that both banks are in a good position in the market. Though TBL is little bit more than EBL.

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

SUMMARY OF RATIOS
Eastern Bank LTD Trust Bank Ltd. 2.43 1.85 1.19 0.07 0.08 23.18 11.17 2.32 4.28% 6.09

Current Ratio
Acid test Ratio
Debt Equity Ratio
Debt to Total Capital Ratio

1.34 1.18 0.91 0.01 2.27 55.7 17.5 5.57 4.34% 5.22

Return on Assets
Return On Capital Employed

Return on shareholder equity Earnings per Share Basic Earning Power Interest Coverage

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Observation and Findings

Based on the ratios and calculations made on my paper I can analyze that current ratio of Trust Bank Ltd. was more better than Eastern Bank, acid test ratio shows us that the position of both bank was almost same but trust banks position was little bit good than eastern bank, debt-equity ratio tells that the Trust Bank Ltd. is trying to lower its debt equity ratio by lowering its liabilities and increasing its equity. And The Eastern Bank Ltd. is trying to higher its debt equity ratio by increasing its liabilities and increasing its equity, return on assets ratio shows that trust banks position was not good, Return on Capital Employed Ratio Eastern Banks position was more better than Trust Banks position, also in Return on shareholder equity Eastern Banks position was satisfactory. And then EPS measures the profit earned per share. The higher EPS will attract more investors to acquire shares in the company as it indicates that the business is more profitable enough to pay the dividends in time. So it is of utmost importance to investors in order to decide the prospects. However in the earning per share ratio Eastern Banks position was better than Trust Bank.

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

IMPORTANCE: Ratio analysis is an important technique of financial analysis. It is a means for judging the financial health of a business enterprise. It determines and interprets the liquidity, solvency, profitability etc. of a business enterprise. It becomes simple to understand various figures in the financial statements through the use of different ratios. Financial ratios simplify, summarize, and systemize the accounting figures presented in financial statements. with the help of ratios analysis, comparison of profitability and financial soundness can be made between one industry and another. Similarly comparison of current year figures can also be made with those of previous years with the help of ratio analysis and if some weak points are located, remedial measures are taken to correct them. If accounting ratios are calculated for a number of years, they will reveal the trend of costs, profits and other important facts. Such trends are useful for planning. Financial ratios, based on a desired level of activities, can be set as standards for judging actual performance of a business. For example, if owners of a business aim at earning profit @ 25% on the capital which is the prevailing rate of return in the industry then this rate of 25% becomes the standard. The rate of profit of each year is compared with this standard and the actual performance of the business can be judged easily. Ratio analysis discloses the position of business with different viewpoint. It discloses the position of business with liquidity viewpoint, solvency view point, profitability viewpoint, etc. with the help of such a study, we can draw conclusion regarding the financial health of business enterprise.

ADVANTAGES:
-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Ratio analysis is an important and age-old technique of financial analysis. The following are some of the advantages of ratio analysis: 1. Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business. 2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms. 3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications. 4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future. 5. Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.

LIMITATIONS:

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations. 1. Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements. 2. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations. 3. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. 4. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. 5. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. 6. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpret and different people may interpret the same ratio in different way. 7. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.

CONCLUSION

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

Ratios make the related information comparable. A single figure by itself has no meaning, but when expressed in terms of a related figure, it yields significant interferences. Thus, ratios are relative figures reflecting the relationship between related variables. Their use as tools of financial analysis involves their comparison as single ratios, like absolute figures, are not of much use. Ratio analysis has a major significance in analyzing the financial performance between two company over a period of time. Decisions affecting the position of company in the current market. Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company. The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firms position and performance. Ratio analysis in view of its several limitations should be considered only as a tool for analysis rather than as an end in itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based. They are as good or as bad as the data itself. Nevertheless, they are an important tool of financial analysis.

Reference
-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS

 Web Sites: WWW.EBL-BD.COM WWW.TRUSTBANK.COM.BD Annual Reports

-ANALYSIS OF FINANCIAL STATEMENT BY USING THE TECHNIQUE OF RATIO ANALYSIS