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Final Project
Date: 21,dec.09

Course:
Financial Management

Submitted to:

Sir Taqi Zaidi

Submitted By:

Sidra Anjum 066


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

Management Sciences
Comsats Institute of Information and Technology
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Final Project
FINANCIAL STATEMENT ANALYSIS OF

BANK AL FALAH

Dedication
We would like to dedicate this project to Sir Umair Saeed and Sir Taqi Zaidi who have
always encourage us throughout in our semester.
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Executive Summary
The primary objective of financial analysis is to forecast or determine the actual financial
status and performance of a project. The Organization is chosen, from the banking sector.
So we have taken BANK ALFALAH LTD, their annual reports of years 2006, 2007,
2008 for Ratio analysis.

Financial ratios can be used to analyze trends and to compare the firm's financials to
those of other firms. Ratio analysis is the calculation and comparison of ratios which are
derived from the information in a company's financial statements.

Common ratios which is used for analysis of Bank:


a) Liquidity Ratios
b) Leverage Ratios
c) Profitability Ratios
d) Asset Management Ratios
e) Market Ratios
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1) Introduction of the project………………………………….. 5


a) Company’s Introduction ………………………………….……….. 6
b) Objectives ………………………………….……………………… 7
c) Significance………………………………………………………… 7

2) Ratio Analysis………………………………………………… 8
a) Liquid Ratio………………………………………………… 9
b) Leverage Ratio…………………………………………… 10
c) Profitability Ratio………………………………………… 11
d) Asset Management Ratio………………………….….….. 13
e) Market Ratios……………………………………………… 14

3) Trend Analysis……………….……………………………….. 16
4) Recommendation …………………………………………… 17
5) Financial Reports
a) Balance Sheet-2008-2007………………………………….. 18
b) Profit/Loss Account-2008-2007…………………………… 19
c) Cash Flow Statement-2008-2007…………………………. 20
d) Balance Sheet-2006………………………………………. 21
e) Profit/Loss Account-2006………………………………… 22
f) Cash Flow Statement-2006……………………………….. 23

6) Bibliography...………………………………………………… 24
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Introduction of Project:

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


creditors, and management to evaluate the past, current, and projected conditions and
performance of the firm.
Ratio analysis is the most common form of financial analysis. It provides relative
measures of the firm's conditions and performance. Financial ratio analysis is an
important topic and is covered in all mainstream corporate finance textbooks.
It is widely used to summarize the information in a company's financial statements in
assessing its financial health. In today's information technology world, real time financial
data are readily available via the Internet.
In the current scenario where financial instability is rife and financial intuitions are
becoming popular, when it comes to investing, the sound analysis of financial statements
is one of the most important elements in the fundamental analysis process.
However, through financial ratio analysis, we shall be able to work with numbers in an
organized fashion and present them in a concise form easily understandable to both the
management and interested investors.
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Introduction of Bank Al-Falah:


Bank Alfalah Limited is a private bank in Pakistan owned by the Abu Dhabi Group.
Bank Alfalah Limited was incorporated on June 21st, 1992 as a public limited company
under the Companies Ordinance 1984. Its banking operations commenced from
November 1st, 1997. The bank is engaged in commercial banking and related services as
defined in the Banking companies ordinance, 1962. The Bank is currently operating
through 195 branches in 74 cities.
Bank Al-Falah is known to perceive the requirements of customers and match them with
quality products and service solutions. During the past five years, this bank has emerged
as one of the foremost financial institution in the region endeavoring to meet the needs of
tomorrow today.
Bank Al-Falah is one of the most important entities in banking sector of Pakistan with a
strong credit rating of AA for long term and A one plus for the short term. Since its
inception, as the new identity of H.C.E.B after the privatization in 1997, the management
of the bank has implemented strategies and policies to carve a distinct position for the
bank in the market place.
Strengthened with the banking of the Abu Dhabi Group and driven by the strategic goals
set out by its board of management, the Bank has invested in revolutionary technology to
have an extensive range of products and services.
Vision:
“To be the premier organization operating locally & internationality that provides the
complete range of financial services to all segments under one roof”
Mission:
“To develop & deliver the most innovative products, manage customer experience,
deliver quality services that contributes to brand strength, establishes a competitive
advantage and enhances profitability, thus providing value to the stakeholders of the
bank”
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Objectives:

The objective of this project is to provide insight into how the bank works, what are the
strengths and weakness of the bank. The objective of financial analysis is to forecast
and/or determine the actual financial status and performance of a bank.
We worked on the financial statements of the bank i.e. Balance sheet of the bank and
make some essential calculations in order to give you an idea about the financial stability
of the bank.

Significance:
Financial statements provide an overview of a business' financial condition in both short
and long term. In assessing the significance of various financial data, experts engage in
ratio analyses, the process of determining and evaluating financial ratios. A financial ratio
is a relationship that indicates something about a company's activities, such as the ratio
between the company's current assets, current liabilities or between its accounts
receivable and its annual sales. The basic source for these ratios is the company's
financial statements that contain figures on assets, liabilities, profits, or losses. Financial
ratios are only meaningful when compared with other information. Since they are most
often compared with industry data, ratios help an individual understand a company's
performance relative to that of competitors; they are often used to trace performance over
time.
The goal in analyzing financial statements is to assess past performance and current
financial position and to make predictions about the future performance of a company.
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RATIO ANALYSIS:
Financial ratios are useful indicators of a firm's performance and financial
situation. Financial ratios can be used to analyze trends and to compare the firm's
financials to those of other firms. Ratio analysis is the calculation and comparison of
ratios which are derived from the information in a company's financial statements.
Financial ratios are usually expressed as a percent or as times per period. Ratio analysis is
a widely used tool of financial analysis. It is defined as the systematic use of ratio to
interpret the financial statements so that the strength and weaknesses of a firm as well as
its historical performance and current financial condition can be determined.

Common ratios which are used for analysis are:


a) Liquidity Ratios
b) Leverage Ratios
c) Profitability Ratios
d) Asset Management Ratios
e) Market Ratios
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Ratio Analysis
a) Liquidity Ratios
Liquidity ratios measure a firm’s ability to meet its current obligations. These include:
Current Ratio:
Current Ratio = Current Assets / Current Liabilities
This ratio indicates the extent to which current liabilities are covered by those assets
expected to be converted to cash in the near future. Current assets normally include cash,
marketable securities, accounts receivables, and inventories. Current liabilities consist of
accounts payable, short-term notes payable, current maturities of long-term debt, accrued
taxes, and other accrued expenses. Current assets are important to businesses because
they are the assets that are used to fund day-to-day operations and pay ongoing expenses.

Year 2006 2007 2008


Current Assets 265182551 316972828 335217471
Current Liabilities 249906022 286843944 315476169
Current ratio 1.06 1.10 1.06

Interpretation
The ratios for the last 3 years are 1.06, 1.10 & 1.06, shows below standard of 2:1 which
means efficient use of funds but at the risk of low liquidity.
.

b) Debt Management Ratios:


By using a combination of assets, debt, equity, and interest payments, leverage ratios are
used to understand a company's ability to meet it long term financial obligations.
Leverage ratios measure the degree of protection of suppliers of long term funds. The
level of leverage depends on a lot of factors such as availability of collateral, strength of
operating cash flow and tax treatments. Thus, investors should be careful about
comparing financial leverage between companies from different industries. These
include:
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Time Interest Earned:


TIE Ratio = EBIT / Interest Charges
The interest coverage ratio tells us how easily a company is able to pay interest expenses
associated to the debt they currently have. The ratio is designed to understand the
amount of interest due as a function of company’s earnings before interest and taxes
(EBIT). This ratio measures the extent to which operating income can decline before the
firm is unable to meet its annual interest cost.

EBIT 17798831 21156515 22125914


Interest charges 15232886 16620963 20331194
TIE ratio 1.16 1.27 1.08

Interpretation
We can see that, this company has covered their interest expenses 1.16 times in 2006,
1.27 times in 2007 and 1.08 times in 2008. It means they haven’t improved in the past
years.

Debt Ratio:
Debt Ratio = Total Debt / Total Assets
The ratio of total debt to total assets, generally called the debt ratio, measures the
percentage of funds provided by the creditors. The proportion of a firm's total assets that
are being financed with borrowed funds. The debt ratio is calculated by dividing total
long-term and short-term liabilities by total assets. The higher the ratio, the more leverage
the company is using and the more risk it is assuming. Assets and liabilities are found on
a company's balance sheet.

Year 2006 2007 2008


Total debt 263443596 312675308 331946025
Total Assets 275685541 328895152 348990764
Debt Ratio 0.95 0.95 0.95
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Interpretation:
Calculating the debt ratio, we came to see that this company is highly leveraged one.

c) Profitability Ratios:

Profitability is the net result of a number of policies and decisions. These ratios, much
like the operational performance ratios, give users a good understanding of how well the
company utilized its resources in generating profit and shareholder value. The long-term
profitability of a company is vital for both the survivability of the company as well as the
benefit received by shareholders. It is these ratios that can give insight into the all
important "profit". Profitability ratios show the combined effects of liquidity, asset
management and debt on operating results. These ratios examine the profit made by the
firm and compare these figures with the size of the firm, the assets employed by the firm
or its level of sales. There are four important profitability ratios that I am going to
analyze:
Net Profit Margin:
Net Profit margin = Net Profit / Sales x 100
Net Profit Margin gives us the net profit that the business is earning per dollar of sales.
This margin indicates the profit after all the costs have been incurred it shows that what
% of turnover is represented by the net profit. An increase in the ratios indicates that a
firm is producing higher net profit of sales than before.

Year 2006 2007 2008


Net Profit 1762691 3130229 1301301
Sales 21191470 25783871 31046583
Net Profit Margin 8.31% 12.1% 4%

Interpretation
Therefore, the Net Profit Margin was 29.07% in 2006, decrease to 19.97% in 2007 and
then again increased to 24.66% in 2008
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Return on Assets:
Return on Assets (ROA) = Profit after Taxation / Average Total assets x 100
ROA, A measure of a company's profitability, equal to a fiscal year's earnings divided by
its total assets, expressed as a percentage. This is an important ratio for companies
deciding whether or not to initiate a new project. The basis of this ratio is that if a
company is going to start a project they expect to earn a return on it, ROA is the return
they would receive. Simply put, if ROA is above the rate that the company borrows at
then the project should be accepted, if not then it is rejected.

Year 2006 2007 2008


Net income 1762691 3130229 1301301
Total Average assets 137966927.5 302290346.5 338942958
ROA 1.27% 1.01% 0.038%

Interpretation
Return on assets decreased gradually throughout the years.

Return on Equity (ROE):


Return on Total Equity = Profit after taxation
Total Equity
Return on Equity measures the amount of Net Income earned by utilizing each dollar of
Total common equity. It is the most important of the “Bottom line” ratio. By this, we can
find out how much the shareholders are going to get for their shares. This ratio indicates
how profitable a company is by comparing its net income to its average shareholders'
equity. The return on equity ratio (ROE) measures how much the shareholders earned for
their investment in the company. The higher the ratio percentage, the more efficient
management is in utilizing its equity base and the better return is to investors.
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Year 2006 2007 2008


Net income 1762691 3130229 1301301
Total Equity 10572605 13766673 14608523
ROE 16.6% 22.5% 8.9%

The Return on Equity was maximum in 2007 but decreased to an extent in the following
years 2007 and 2008. This again may have happened due to the issue of more long-term
debt in 2007 and 2008.

d) Asset Management Ratios:


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

Fixed Assets Turnover:


This ratio is indicates that how much sales are contributed by investment in fixed Assets.
Fixed Assets Turnover = Net Sales / Fixed Assets

Year 2006 2007 2008


Net Sales 21191470 25783871 31046583
Fixed Assets 10502990 11922324 13773293
Sales to Fixed Assets 2.017 times 2.16 times 2.25 times

Total Asset Turnover:


Total Asset Turnover = Total Sales / Total Assets
The amount of sales generated for every dollar's worth of assets. It is calculated by
dividing sales in dollars by assets in dollars. Asset turnover measures a firm's efficiency
at using its assets in generating sales or revenue - the higher the number the better. It also
indicates pricing strategy: companies with low profit margins tend to have high asset
turnover, while those with high profit margins have low asset turnover.
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Year 2006 2007 2008


Total Sales 21191470 25783871 31046583
Total Assets 275685541 328895152 348990764
Total Asset Turnover 0.07 0.07 0.08

e) Market Ratio:
Market Value Ratios relate an observable market value, the stock price, to book values
obtained from the firm's financial statements.
Earnings Per Share- EPS:
Earnings Per Share = Net Income
Number of Shares
The portion of a company's profit allocated to each outstanding share of common
stock. Earnings per share serve as an indicator of a company's profitability. Earnings per
share are generally considered to be the single most important variable in determining a
share's price. It is also a major component used to calculate the price-to-earnings
valuation ratio.

Year 2006 2007 2008


Profit after Taxation 1762691 3130229 1301301
Number of Shares 500000 650000 799500
Earnings Per Share 3.525 4.815 1.627

Price / Earnings Ratio:


Price / Earnings Ratio = Stock Price Per Share
Earning Per Shares
The Price-Earnings Ratio is calculated by dividing the current market price per share of
the stock by earnings per share (EPS). (Earnings per share are calculated by dividing net
income by the number of shares outstanding.)
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The P/E Ratio indicates how much investors are willing to pay per dollar of current
earnings. As such, high P/E Ratios are associated with growth stocks. (Investors who are
willing to pay a high price for a dollar of current earnings obviously expect high earnings
in the future.) In this manner, the P/E Ratio also indicates how expensive a particular
stock is. This ratio is not meaningful, however, if the firm has very little or negative
earnings.

Year 2006 2007 2008


Stock price per share 10 10 10
EPS 3.525 4.815 1.627
Price / Earnings Ratio 2.83 2.07 6.14

Interpretation
The P/E ratio was 2.83 times in 2006 and decreased a little bit in 2007. However, in 2008 it
increased as much higher than before to 6.14 times.

Book Value per Share:


Book Value per Share = Shareholders’ Equity
Share Capital

This is defined as the Common Shareholder's Equity divided by the Shares Outstanding
at the end of the most recent fiscal quarter. It is the Indication of the net worth of the
corporation. Somewhat similar to the earnings per share, but it relates the stockholder's
equity to the number of shares outstanding, giving the shares a raw value. Comparing the
market value to the book value can indicate whether or not the stock in overvalued or
undervalued.

Year 2006 2007 2008


Equity 10572605 13766673 14608523
Share Capital 5000000 6500000 7995000
Book Value per Share 2.11 2.11 1.82
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Trend Analysis:
A firm's present ratio is compared with its past and expected future ratios to determine
whether the company's financial condition is improving or deteriorating over time. Trend
analysis studies the financial history of a firm for comparison. By looking at the trend of
a particular ratio, one sees whether the ratio is falling, rising, or remaining relatively
constant. This helps to detect problems or observe good management.

TREND ANALYSIS
FOR THE YEARS 2006, 2007 & 2008

Performance Area 2006 2007 2008 Trend


a) Liquidity Ratios

Current Ratio Higher liquidity in


1.06 1.10 1.06
2007
b) Leverage Ratios

Time Interest Earned 1.16 1.27 1.08


Lower since 2008

Debt Ratio Leverage remain


0.95 0.95 0.95
same
c) Profitability Ratios

Net Profit Margin 0.08% Lower profitability


0.12% 0.04%
during 2006
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Return on Assets 0.01277618 0.01035504


0.0038393 Lower ROA during
5 1
2007

d) Asset Management
Ratios:
Fixed Assets Turnover
2.017 times 2.16 times 2.25 times Lower in 2006
Total Asset Turnover Higher efficiency
0.07 0.07 0.08
since 2008
e) Market Ratios:

Earning Per Share- EPS


3.525 4.815 1.627 Higher In 2007
Price / Earning Ratio
0.54 0.68 0.49 Lower in 2008

Book Value per Share Good market


2.11 2.11 1.82
perceptions
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Recommendations:
• Bank need to improve their liquidity status
• Bank al falah need to improve their financial performance in order to compete.
• Bank Al falah Limited has to minimize it financial charges.
• Bank need to reduce financial leverage risk.
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Financial Statements:
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Bibliography:

• Internet sources
• www.investopedia.com
• www.bankalfalah.com
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