Ratio Analysis

Ratio is a mathematical relationship between two quantities. In financial statement analysis,

ratios are used to evaluate the overall financial condition of a company. Ratio analysis can be
used prior to making investment decision, to measure how a company’s performance stacks up
against industry standards. A single ratio is not sufficient to identify the true picture. The main
ratios taken in this study are described below.

a) Liquidity Ratio
Liquidity Ratio is a class of financial metrics that is used to determine a company's ability to pay
off its short-terms debts obligations. Generally, higher the value of the ratio, the larger is the
margin of safety that the company possesses to cover short-term debts. Liquidity ratio Measures
Company’s ability to turn short-term assets into cash to cover debts is of the utmost importance
when creditors are seeking payment.

 Cash and bank balance to total deposit ratio

Balance ∈NRB + Balance with Other Bank +Cash Balance
=
Total deposit

 Liquid Assets to Total Deposit Ratio

Total Liquid Assets
= Total Deposit

 Investment on Government Securities To Current

Investment onGovernment Securities
=
Current Assets

 Loan and Advances to Current Assets Ratio

Loan∧ Advances
=
Total Current Assets
b) Assets Management Ratio
The asset management ratios, measures how effectively the firm is managing its assets. These
ratios are designed to answer this question: does the total amount of each type of asset as
reported on the balance sheet seem reasonable or not. If a firm has excessive investments in
assets then its capital costs will be unduly high and its stock price will suffer. (Brigham, 1992 p
74) In this study this ratio is used to indicate how efficiently the selected banks have arranged
and invested their limited resource.

 Loan and Advances to Total Deposit Ratio

Loan∧ Advances
=
Total Deposit

 Total Investment to Total Deposit Ratio

Total Investment
=
Total Deposit

 Investment on Shares, Debentures And Bonds To Total Deposit

Investment on Shares∧Debentures∧Bonds
=
Total Deposit

c) Profitability Ratio
Profit is only appeared when there is positive difference between total revenues and total cost
over a certain period of time. Profitability ratios show the combined effects of liquidity, assets
management, and debt on operating results. Profitability ratio measures the overall banking
operation of the company in regards to the profit. Profitability ratio is determined by the financial
institution to find out their profit earning capacity on various kinds of funds they employed.
Profit indicates the efficiency of the bank. A bank can make the profit through the sound lending
policy and the quality of service it provides. Higher is the profit ratio higher will be the efficiency
of the bank.
  Return on loan and advances
Net Profit ( Loss)
=
Loan∧ Advances

 Return on total working fund ratio

Net Profit
=
Total Working Fund

 Total Interest Earned to Total Working Fund Ratio

Total Interest Earned
=
Total Working Fund

 Total Interest paid to Total Working Fund Ratio

Total Interest Paid
=
Total Working Fund

 Return on Shareholders’ Equity

Net Profit
=
Shareholder ' s Equity

 Return on Investment
Net Profit
=
Total Investment

d) Risk Ratio
Risk ratio measures the level of risk. Risk always sticks with return. Higher the risk, higher will
be the return. Bank has to take high risk if it expects high return on its investment. Hence, bank
has to accept and manage high risk so as to achieve higher rate of return.
  Liquidity Risk Ratio
Cash∧Bank Balance
=
Total Deposit

 Credit Risk Ratio

Total loan∧advances
=
Total Assets

3.7 Limitation of the Study

The proposed study has certain limitation on its part, which are as follows:

 This study is limited to Nabil bank Ltd in Nepal.

 This research work is confined only to the resource mobilization, liquidity and
profitability position of commercial bank in Nepal.
 The study has undertaken the data of last three years only.
 For the forecast of the liquidity requirement, daily and monthly data is needed. But due to
time and cost constraints, only the annual data is used for analysis.
 Only the secondary data is used.
 The study is only fulfill the requirement for the degree of bachelor in business studies,
which cannot cover all the dimension of the all subjects matter and resource and time
period is also limited.
 CHAPTER 4
RESULT AND FINDINGS

Presentation and analysis of the data is the core of each and every research work. This study
requires some financial and statistical tools to accomplish the objective of the study. The various
results obtained with the help of financial, accounting and statistical tools are tabulated under
different headings. As the main objective of the study is to analyze the deposit mobilization of
selected banks; the necessary financial facts and figures as well as descriptive information are
gathered through the financial statement. The major variables for the study are cash and bank
balance, total investment, investment on government securities and share and debenture and
fixed deposit in commercial banks.

4.1 Liquidity Position

Liquidity position of the banks can be analyzed by the level of liquid funds banks are
maintaining. Liquidity ratios are applied to measure the ability of the firms to meet short term
obligations. it measures the speed of firms to convert the firms asset into cash to meet deposit
withdraws and other current obligations. This is quick measure of the liquidity and financial
strength of the firm.

4.1.1 Cash and Bank Balance to Total Deposit Position

Cash and Bank Balance to Total Deposit helps to identify the total cash balance a bank has with
it and in other bank. It identifies the liquidity position of the bank Cash and Bank balance to total
deposit position can be obtained calculation cash and bank balance to total ratio. This ratio is
computed dividing the amount of cash and bank balance by the total deposits.