Assessments of Financial Ratio Analysis as a Measure of Organisational Performance : A Study of Selected Banks in Nigeria

CHAPTERONE INTRODUCTION 1.1 Background to the Study Beyond financial

crunching

statements,

and the

depicting

primordial

numbers goal

of

in

the

financial

management is creating wealth (Tugas, 2012). Wealth creation and general performance of any organisation are measured in terms of its financial strength and weakness using financial ratio (Shirkouhi, et al, 2012). Wealth creation is best achieved by maximizing firm’s value through optimal usage of resources over a long period of time (Tugas, 2012). In other words, it is the continuous and sustainable accumulation of more assets (growth) as time passes by. Putting these into perspective, wealth creation is a factor of a series of sound business decisions, made one after the other, that originate from structured or scientific basis. As risks are the ones that prevent any firm from achieving its objectives, coming up with structured and scientific bases of decisions reduces the likelihood of the former (risks). In financial management, one of these structured and scientific 1

bases on which firm decisions are anchored is the financial statement analysis (Tugas, 2012). According to Drake (2010), financial statement analysis is the selection, evaluation, and interpretation of financial data, along with other pertinent information, to assist in investment and financial decision-making. Moreover, it is also the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account (accounting for management website). One of the tools in financial statement analysis is financial ratio analysis. As financial statements are usually lengthy, it will be more efficient and strategic to just pick up the figures that matter and plug them in pre-defined formulas developed through time by finance and accounting scholars. Financial ratios provide insight into the strengths and weaknesses of a business and give the managers indications of areas that need improvement (Heidari, 2012).

2

A thorough knowledge of which ratios to be used and how to use them is a critical management skill. The primary focus of every business is to make a profit, have enough liquidity to pay its bills and maintain control of borrowed funds (Heidari, 2012). Several ratios give managers the tools to evaluate these areas and measure their performance. Businesses should constantly monitor these ratios to detect

negative

trends

and

identify

areas

that

need

improvement. Thus financial ratio information assists its financial

statement

users

in

obtaining

the

relevant

information concerning the detail and source of cash for operating, investing and financing activities of the company over a reported period. While most business owners focus on providing

exceptional

products

and

services

to

their

customers, they must also pay attention to the performance and health of their company (Heidari, 2012). This study is therefore concerned with the analysis of financial ratios as a measure of performance of commercial banks in Nigeria. 1.2 Statement of the Problem

3

Proper

evaluation/measurement

of

a

company

performance for investors, shareholders and lenders is of paramount importance to management of all businesses in general. Performance evaluation using financial ratios from the statement of cash flow (SCF) have gained attention from academicians

and

industry

practitioners

(DeFranco&Schmidgall, 1998; Schmidgall, Geller, &Ilvento, 1993) as cited in (Ryu& Jang, 2004). This is mainly due to the ability of financial ratios provide supplementary information in understanding the "real" operational status of a business. Despite the fact that financial ratios are becoming increasingly

important

yardstick

for

performance

measurement, limited efforts have been made to investigate the best set of ratios for measuring financial performance of firms especially in emerging economies like Nigeria. Thus, this study is a modest attempt aimed at filling the hitherto existing gap in the literature by examining the performance of the banks using profitability, liquidity and leverage ratios; and

ascertains

whether

profitability

4

ratios

are

better

measure of performance of commercial banks as compared to liquidity and leverage ratios. 1.3 Objectives of the Study The broad objective of this study is to access which set of financial ratios are better measure of firms’ performance. The specific objectives are: 1. To evaluate the financial performance of commercial banks using profitability, liquidity and leverage ratios. 2. To ascertain whether there is a significant difference in the performance of commercial banks when measured usingprofitability ratios and liquidity ratios. 3. To ascertain whether there is a significant difference in the performance of commercial banks when measured using profitability ratios and leverage ratios. 1.4 Research Questions The following research questions are designed to guide this study: 1. What is the financial performance of commercial banks using profitability, liquidity and leverage ratios?

5

2. Is there any significant difference in the performance of commercial banks when measured using profitability ratios and liquidity ratios? 3. Isthere any significant difference in the performance of commercial banks when measured using profitability ratios and leverage ratios? 1.5 Research Hypotheses The following hypotheses have been formulated to guide this investigation. Ho1: There is no significant difference in performance of commercial banks when measured using Profitability ratios and liquidity ratios. Ho2: There is no significant difference in performance of commercial banks when measured using Profitability ratios and leverage ratios. 1.6 Significance of the Study The

significance

of

this

study

cannot

be

over-

emphasized as long as the information need of various users of financial statement is concerned. This is because, it is only through financial ratio evaluation that data reported in the 6

financial statement can be meaningfully interpreted and gainfully applied in decision making. Shareholders as well as prospective investors will be able to know the profit earning ability of the bank and the efficiency at which resources of the bank are being used. They will be able to know the ability of the bank to pay dividend. Employees are interested in the profitability of the firm in order to be able to bargain for higher wages as well as ascertain the ability of the firm to continue operation, where the profitability of the firm is on the decline or negative, the employees will be afraid of facing massive retrenchment. The solvency and liquidity of the firm are of peculiar importance to the creditors and financial institutions. The more insolvent a firm is, the higher the risk of failure associated with such firm. Management will be

able

to

know

the

overall

performance of the bank. They will be able to spot out the bank’s areas of strength and weakness, evaluate the present financial policy of the firm and see to what extend the financial obligation of the bank is being achieved.

7

Finally as an academic work, this study update existing literature on the topic and inform the readers and scholars generally on the use of financial ratios to get useful information from financial statement. These same analyses identify the financial strengths and weaknesses of a firm. This may be accomplished either through a comparison of the firm’s ratio’s over a period of time or through a comparison of the firms ratios with their nearest competitors and

with

the

industry

average.

With

all

these,

Scholar/Academia and researchers may find this work very important as well as reference point. That is to say, this research work will serve as a reserviour of knowledge for further research. 1.7 Scope of the Study This research work is set out basically to evaluate the financial performance ofbanks, thus the scope of this study covers money deposit banks with particular emphasis toAccess Banks Plc, Sterling Bank Plc, Eco-Bank Plc, First city monumental bank (FCMB). The scope of this study in relation to time covers a period from 2009 to 2013.

8

CHAPTER TWO REVIEW OF RELATED LITERATURE 2.1 Introduction

9

This chapter reveals relevant literature on financial ratios. The chapter will specifically focus on the conceptual framework, historical development of financial analysis, nature and purpose of financial ratios analysis, relevance of financial ratios in analysing financial statement, users of financial ratios, major categories of financial ratios, criteria for functional analysis, achievements and significance of ratios, weakness, limitations of ratio analysis and review of empirical studies. 2.2 Historical Development of Financial Analysis Financial statements analysis originated from United States of America (USA) in the second half of the nineteen century. It was in conjunction with industrial revolution with the emergence of two professional managers who were concerned with two important aspects:

1. The credit analysis which emphasized the ability

10

2. The

managerial

ability

which

emphasized

profitability measures. But the credit analysis approach

dominated

the

general development of ratio analysis especially, in the early years and had gained an undertaking pattern of how ratio analysis evolved. There were empirical study by Aitman (1974) who had employed several financial ratios to predict the corporate bankruptcy through the multi discriminant out of the 20 several ratios examined by him; he selected five (5) that did the best combined job in predicting bankruptcy. Financial analysis can be undertaken by management of the firms or parties outside the firm. Pandey noted further that the nature of analysis will differ depending on the purpose of the analyst. He further explained that the financial literature, a lot of importance has been attached to financial ratios for assessing the financial health of a firm. Ratios can be worked out because between any items and that means there may be as many ratios as there are number of items, which can be set against each other. But 11

under an assessment of financial ratio it is not the practice to work out or to assess all the ratios, only required ratios depending upon the

purpose of the analysis will be

assessed. Besides it is worth to note that though financial ratios can be assessed even from a single corporate, but then it will not be helpful to know the general trend of a business in management’s liquidity and profitability. The purpose can be served If only ratios are assessed from the series of companies only. Then the ratio analysis will help to disclose in what manner the business has been generally forgoing or otherwise under each and every item. When this trend is known the future can be easily projected assuming that other things are equal. 2.3 Conceptual Framework 2.3.1 Concept of Financial Ratios To

make

rational

decision

towards

achieving

the

objectives of the firm, the financial manager need to have certain analytical tools. One of such tools is financial ratio analysis. The balance sheet shows the financial data from 12

these statements to enable users of financial gain insight with better understanding of the financial statement. Financial analysis is the process of identifying the financial strength and weakness of the firm by properly establishing the relationship between the items of the balance sheet and the profit and loss accounts. According to Ibiayo, (2004) defines financial ratio analysis as a technical part of credit analysis used in making decision that has to do with concrete method of analysis of financial statement. Financial ratios relate balance sheet account to one another and also relate income statement. Igben, (1999) defines ratios as a proportion or fraction or percentage which expresses the relationship between one items in a set of financial statement. Jack endoff (1962) in his article: “a study of published industry financial operating ratio found that financial ratio consistently and clearly distinguished between profitable and unprofitable firms I a period of 1945 – 55. The current ratio, the working capital to total assets, and net worth to total 13

debt ratio of profitable firms were consistently higher. But the relationship of the total assets to turn over appeared to be inversed to the size of the firm. Jenning, (1999) defines ratios simply as one express in terms of another number to show the relationship between the numbers. It affords a means of comparing figures prepared on different basis. Financial ratio is an analytical used to evaluate performance and access credit risk. Needless, et al (1999) defined financial ratio analysis as an importance way of stating meaningful relationship between the components of financial statements. The interpretation of ratio must include a study of the underlying data. Ratios are guide or shortcuts that are in evaluating a company’s financial position and operations and making comparisons with result in previous years or with other companies. They identified purpose of ratio to include pointing out areas needing further investigation. Pandey (2005) defined financial ratio analysis as the process of identifying the financial strength and weakness of 14

the firm by properly establishing relationship between the items of balance sheet and the profit and loss account. 2.3.2 Nature and Purpose of Financial Ratios Analysis Ratio as a powerful tool of financial analysis is defined according Pandey (2005), as indicated questioned of two mathematical expressions and as the relationship between two or more things. Ratio is used as a bench mark for evaluating the financial position and performance of firm it help to summarise in large quantities of financial data to make to quantitative judgement about the firm’s financial performance. Therefore Leopold and Joans, (1997) regarded financial ratio to be basically used for two purposes. 1. For assessing the performance of as a particular company over a period of time. 2. For comparing the performance of a company at the same point in time. Other purposes of financial ratios according to Adeniyi (2004) are 15

1. It indicates the operating efficiency with which the firm is utilising its assets to generate sales revenue. 2. It indicates the extent to which the firm has used its long term solvency by borrowing funds. 3. It indicates the ability of the firm to meet its current obligations. 4. It indicates the efficiency and performance of the firm. 2.3.3 Relevance of Financial Ratios in Analyzing Financial Statement. Bit information standing alone is meaningless an item can be judged only by comparison with one or other times relatively with good understanding of their differences. Analysis can help make financial data more useful to particular types of statement users. Thus the purpose of financial statement analysis is to tailor information to the needs of the users. The financial

absolute statement

accounting do

not

figures provide

reported a

in

the

meaningful

understanding of the performance and financial position of a

16

particular firm. For instance, a net profit figure as related to the

company’s

portfolio

investment.

This

relationship

between two accounting figures is mathematically known as financial ratios. Therefore, financial ratios help size up a company as trends and relative to others (Pandey, 1999). Financial ratios contribute more to the financial analyst to make quantitative judgement about the company’s financial performance and position (Pandey 2005).

2.3.4

Users of Financial Ratios

Financial ratios can be undertaken by management of the firm or by parties outside the firm, Viz; owners, creditors, Investors and others. The nature of analysis will differ depending on the purpose of the analyst. Adeniyi (2004) recognized the following users and their specific needs since financial statement of an enterprise are used by many categories of people who have contact with the business:

17

1. Management: They are concerned with the internal control profitability of company and efficiency of management of assets, they are interested in all aspects

of

financial

ratio

analysis

that

outside

investors used to evaluating the firm to bargain effectively for more funds 2. Shareholders: They are interested in the ability of the business to pay interest and repay the principal sum on a due date 3. Creditors (Long-term and short-term): They are interested in the ability of the business to also pay interest and report principal sum on a due date, shortterm creditors for instance evaluate the firm liquidity position. 4. Government:

Government

is

interested

in

the

business profit to assess tax liabilities and may also be interested in other information e.g. statistics on the employment and wage level 5. Customers: They are interested in the ability of the company to maintain supplies

18

6. Employees: They are interested in a long-term stability of the company on which their job depends and on the company’s ability to meet wage demands. 7. Financial analyst and Advisers: They are interested in advising their audience and that can be any of the other interested groups for instance, stockholders

are

interested

in

the

information

on

profitability and prospects of capital growth to advice investors and potentials investors. 8. Competitors: They are interested in corporative performance of a business. 2.4. Types of Accounting Ratio Financial ratio analysis is a tool for interpreting financial statements. It can provide an insight into two important areas of management; the return on investment earned and the soundness of the firm’s financial position. This technique of analysis compares certain related items in the financial statement to each other’s in a meaningful manner. The accounting ratios may be classifies into the following: 1. Liquidity Ratios 19

2. Leverage Ratios 3. Activity Ratios 4. Profitability Ratios. 2.4.1. LIQUIDITY RATIOS. Liquidity ratios measure the firm’s ability to meet its current obligation. According to Chordia et al (2005), Liquidity is the capability of a firm to sell assets at a sound price to meet its short term financial debts. Liquidity ratios verified that a particular firm has sufficient resources to meet its current liabilities which are payable within a year. It is extremely essential for a firm to be able to meet its current financial obligation as they become due. In fact, the analysis of liquidity needs the preparation of cash budgets and cash flow statements, but liquidity ratios by establishing a relationship between cash and other current assets to current obligationsprovides a quick measure of liquidity. Pandey (2004:503) state that the liquidity ratios which indicate the extent of liquidity or lack of it are: i. Current Ratio ii. Quick Ratio (Acid Test Ratio) iii. Cash Ratio 20

iv. Working Capital Ratio. CURRENT RATIO: This ratio compares total assets with total liabilities. According to Fraser &Ormiston (2004), current ratio is the ability of a company to meet its debts requirements as they become payable. The rationale behind this is to determine the extent to which all liquid and marketable securities (cash, stock, debtors and inventories as well as prepayment) would suffice to defray all short-term liabilities (creditors, bank overdraft, dividends payable and current taxation). If all these become due at the same time, this ratio is an important measure of potential liquidity, although the assumption that all current assets can be realized on the same day is a major weakness. The current ratio is a measure of the firm’s short-term solvency. A ratio if greater than one has more current assets than current liabilities or claims against them. As a conventional rule, a current ratio of 2:1 or more is considered satisfactory. Current Ratio=Current Assets Current Liabilities 21

The current ratio represents a margin of safety, i.e a “cushion”of protection of creditor, the higher the current ratio, the greater the margin of safety, the higher the amount of current assets in relation to current liabilities, the more the firm’s ability to meet its current obligation. Current assets can decline in value but current liabilities cannot decline in value. If the firm’s current assets consist of doubtful debts and showing unstable stock of goods, then the firm’s ability to pay back is inspired. Its short term solvency is threatened. Thus, too much reliance should not place on the current ratio, further investigation about the quantity of current assets should be carried-out, and however the current ratio is a crude and quick measure of the term liquidity. QUICK RATIO (ACID TEST RATIO): This is a more refined measure of liquidity of a firm. The ratio establishes a relationship between quick or liquid assets and current liabilities. According to Horngren et al (1999), Quick or acid test ratio is the ability of a company to meet its current liabilities as they come due immediately. Quick ratio 22

eliminates the liquidation of inventories from the numerator, measured the least liquid current assets. The quick ratio is thus found by dividing the total of the quick assets by the total current liabilities. Quick Ratio=Total Quick or Liquid Assets Total Current Liabilities Quick assets include cash and debts (debtors and bills receivables). Inventories are excluded because it takes time to sell finished goods and convert raw materials and work-inprogress into finished goods. Also, there is uncertainty as to whether or not the inventories can be sold. Prepaid expenses should also be excluded because they cannot be converted into cash. Generally, a quick ratio of 1:1 is considered to represent a satisfactory current financial condition. Although the quick ratio is a more penetrating test of liquidity than the current ratio, yet it should be used with cautious. A quick ratio 1:1 or more does not necessarily imply sound liquidity position. It should be remembered that all bad debts may not be liquid 23

and cash may be immediately needed to pay operating expenses. It should also be noted that the liquidity ratios are subject to the influences of other financial forces which can improve or deteriorate the ratios in no time. The ratios fluctuate not only because of the movement of receivables and inventories, but are also affected by changes in fixed assets, investment, sales and profit or loss. CASH RATIO: Since cash is the most liquid asset, a financial analyst may examine this ratio. However, some authors use the word liquidity ratio for cash ratio since trade investment or marketable securities are equivalent of cash. Therefore, they may be included in the computation of cash ratio which is cash plus marketable securities divide by cash liabilities. Cash ratio is calculated thus; cash plus marketable securities divide by cash liabilities. Cash Ratio=Cash + Marketable Securities Cash Liabilities.

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WORKING CAPITAL RATIO: The working capital ratio is a liquidity ratio that measures a firm’s ability to pay off its current liabilities with current assets. The working capital ratio is important to creditors because it shows the liquidity in the company. Current liabilities are best paid with current assets like cash, cash equivalents, and marketable securities because these assets can be converted into cash much quicker than fixed assets. The faster the assets can be converted into cash, the more likely the company will have the

cash

in

time

to

pay

its

debts

(www.myaccountingcourse.com). The reason this ratio is called the working capital ratio comes from the working capital calculation.When current assets exceed current liabilities, the firm has enough capital to run its day-to-day operations. In other words, it has even capital to work. The working capital ratio transforms the working capital calculation into a comparison between current assets and current liabilities. The working capital ratio is calculated by dividing current assets by current liabilities. 25

Working Capital Ratio=Current Assets Current Liabilities This calculation makes the firm to understanding what percentage a firm’s current assets are to its current liabilities.

2.4.2 Leverage Ratios. These ratios can be called long-term solvency ratios. Business organization derives a measure of advantage from this by borrowing on medium and long-term basis in order to finance part of their operations. Such advantages which of this form enhanceearning per share if the return on assets exceeds the cost of servicing the loan and this often referred to as leverage effect. According to Sharma (2012), Leverage ratios involve the obligations a company holds along with the shareholder’s equity. It is used to show the firm’s ability to meet its financial obligations. 26

Short-term creditors like bankers, suppliers of raw materials are more concerned with the firm’s current debt paying ability. On the other hand, long-term creditors like financial

institutions,

debenture

holdersetc

are

more

concerned with the firm’s long-term financial strength. In fact, a firm should have a strong short-term as well as longterm financial position. In order to judge the long-term financial position of a firm, financial leverage or capital structure ratio are calculated. Thus, leverage ratio is calculated to measure the financial risk and the firm’s ability of using debt for the benefit of its shareholders. The principal leverage ratios are as follows: i. ii. iii. iv.

Debt to Assets Ratio Debt to Equity Ratio Debt to Total Capitalisation Ratio Time-Interest-Earning Ratio

DEBT TO ASSETS RATIO: The ratio of debt to total assets, generally called the debt ratio measures the percentage of total funds provided by creditors. According to Brigham & Houston (2009), the ratio of total debt to total assets measures the percentage of funds provided by creditors. 27

This debt includes both current liabilities and all bonds. Creditors prefer low debt ratios this is because the lower the ratio, the greater the caution against creditors losses in the event of liquidation, in contrast to the creditors preferences for a low debt ratio, the owners may seek high leverage ratio in order to either; a) Magnify earnings or b) Because of selling new stock means giving up degree of control. Therefore, debt ratio is calculated thus:

Debt Ratio = Total Debt Total Assets

or

Debt Ratio = Total Liabilities Total Assets. DEBT

TO

EQUITY

RATIO:

This

ratio

includes

the

relationship between long-term funds provided by creditors and those provided by the firm’s owners. Fraser &Ormiston (2004) noted that the debt to equity ratio measures the 28

riskiness of the company’s capital structure in terms of the relationship between the funds supplied by creditors and investors. It is commonly used to measure the degree of financial leverage of the firm. It is calculated by dividing long-term debt by stakeholders’ equity. Debt-Equity Ratio = Long-term Debt Stakeholders’ Equity. Firms with large amount of fixed assets and stable cash flow typically have high debt- equity ratios; while other less capital intensive firms normally have lower debt-equity ratios. DEBT TO TOTAL CAPITALISATION RATIO: This measures the percentage of the firm’s long-term funds supplied by its creditors. The firm’s long-term funds are referred to as its total capitalization. They include both long-term debt and the

shareholders

equity.

The

ratio

of

debt

to

total

capitalization can be calculated by dividing long-term debt by total capitalization.

29

Debt-Total CapitalisationRatio =Long-term Debt Total Capitalisation Since there is great similarity between the debt to equity ratio and debt to total capitalization ratio, an analyst needs only one of these two for analysis, the resulting value is meaningful only in the light of the nature of the firm's operations and industry averages. TIME-INTEREST-EARNED RATIO: The times interest earned ratio, sometimes called the interest coverage ratio, is a coverage ratio that measures the proportionate amount of income that can be used to cover interest expenses in the future. In some respects the times interest ratios is considered a solvency ratio because it measures a firm’s ability to make interest and debt service payments. The times interest earned ratio is calculated by dividing income before interest and income taxes divided by the interest expenses. Time–Interest to earned ratio = Income before Interest + Income taxes 30

Interest expenses Since this interest payment is usually made on a long term basis, they are often treated as an ongoing fixed expense.As with most fixed expense, if the company can’t make the payments, it could go bankrupt and cease to exist.Thus, this ratio could be considered a solvency ratio (investopedia.com). 2.4.3 Activity Ratio Activity or turnover ratio represents the firm’s ability to obtain the highest income by using its resources correctly (Hussianet al 2013).It is an accounting ratio that measures a firm’s ability to convert different account within its balance sheets into cash or sales. Activity ratio are used to measure the relative efficiency of a firm based on its use of its assets, leverage or other such balance sheet items.These ratios are important in determining whether a company’s management is doing a good enough job of generating revenues, cash etc. from its resources.

31

Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues.Such ratios are frequently used when

performing

fundamental

analysis

on

different

companies.Baruch(1974) said that, incalculating turnover ratio sales revenue remains as the numerator whereas assets, account receivables, inventory etc are used as the denominator. The commonly used turnover ratios are as follows: i. Accounts Receivable Turnover ii. Accounts Payable Turnover iii. Fixed Assets Turnover iv. Inventory Turnover v. Total Assets Turnover. ACCOUNT RECEIVABLE TURNOVER:This is an efficiency ratio or activity ratio that measures how many times a business can turn its account receivable into cash during a period. According to Fraser and Ormiston (2004), the accounts receivable turnover ratio measures how many times, an average accounts receivable are collected in cash during the year. This ratio shows how efficient a company is

32

at collecting its credit sale from customers. Some companies collect their receivable from customers in 90days while others take up to 6 months to collect from customers. In some ways the receivables turnover ratio can be viewed as a liquidity ratio as well. Companies are liquid the faster they can convert their receivables into cash. Accounts receivable turnover is calculated by dividing net credit sales by the average accounts receivable for that period. Account Receivable Turnover = Net credit sales Average account receivable Since the receivables turnover ratio measures a firm’s ability to efficiently collect its receivables, it only makes sense that a higher ratio would be more favourable. Higher ratio means that companies are collecting their receivables more frequently throughout the year. Accounts receivable turnover is also an indication of the quality of credit sales and receivables. A company with a higher ratio shows that credit sales are more likely to be collected than a company with a lower ratio. Account receivable turnover is very 33

important because it is often posted as collateral for collecting loans. ACCOUNT PAYABLE TURNOVER:The accounts payable ratio is a liability ratio that shows a company’s ability to pay off its accounts payable by comparing net credit purchases to the average accounts payable during a period. According to Fraser &Ormiston (2004), the accounts payable turnover ratio measures how many times on average, accounts payable are paid during the year. In other words, the accounts payable turnover ratio is how many times a company can pay off its average accounts payable balance during the course of a year. This ratio helps creditors analyzed the liquidity of a company by gauging how easily a company can pay off its current suppliers and vendors. Companies that can pay off supplies frequently throughout the year indicate to creditor that they will be able to make regular interest and principal payments as well. The accounts payable turnover ratio is calculated by dividing the total purchases by the average accounts payable for the year. 34

Accounts Payable Turnover =Total Purchases Average Accounts Payable Since the accounts payable turnover ratio indicates how quickly a company pays off its vendors, it is used by suppliers and creditors to help decide whether or not to grant credit to a business. As with most liquidity ratio, a higher ratio is almost always more favorable than a lower ratio; a higher ratio shows suppliers and creditors that the company pays its bills frequently and regularly. It also implies that new vendors will get paid quickly.A high turnover ratio can be used to negotiate favorable credit terms in the future. As with all ratios, the accounts payable turnover is specific to different industries. That is, it is best used to compare similar companies in the same industry. FIXED ASSET TURNOVER: According to Powell (2005), fixed asset turnover is the ratio of sales (on the profit and loss account). It indicates how well the business is using its fixed assets to generate sales. Fixed asset turnover ratio is an Activity ratio that measures how successfully a company 35

is utilizing its fixed assets in generating revenue. A higher fixed asset turnover ratio is generally better. However, there might be situations when a high fixed asset turnover ratio might not necessarily mean efficient use of fixed assets. Fixed asset turnover is calculated by dividing the net revenue by average fixed assets. Fixed Assets Turnover = Net Revenue Average Fixed Assets According to Fraser &Ormiston (2004), fixed assets turnover is extremely important for a capital intensive company and considers only the company’s investmentin fixed assets. In other words, the higher the ratio the better,because a high ratio indicate that the business has less money tied up in fixed assets for each unit of currency of sales revenue. A declined ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets. INVENTORY TURNOVER: The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is 36

managed by comparing cost of goods sold with average inventory for the period. Sharma (2012) studied that inventory turnover ratio is employed to represent the number of times inventory is sold or used in the company during the financial era. It also measures how many times average inventory is turned or sold during a period. This ratio is important because turnover depends on two main components of performance. The first component is stock purchasing; if larger amount of inventory are purchased during the year, the company will have to sell greater amount of inventory to improve its turnover. The second component

is

sales;

sales

have

to

match

inventory

purchases otherwise the inventory will not turn effectively. The inventory turnover ratio is calculated by dividing the cost of goods sold for a period by the average inventory for that period. Inventory turnover = Cost of Goods Sold Average Inventory.

37

Since inventory turnover is a measure of how efficiently a company can control its merchandise, it is important to have a high turn. This shows the company does not over spend by buying too much inventory and waste resources by storing nonsalable inventory. It also shows that the company can effectively sell the inventory it buys.This measurement also shows investors how liquid a company’s inventory is; that is, how easily a company can turn its inventory into cash. TOTAL ASSETS TURNOVER:The total assets turnover ratio measures the ability of a company to use its assets to efficiently generate sales. It measures the efficiency of managing all of a company’s assets (Fraser &Ormiston 2004). This ratio considers all assets, current and fixed. These fixed assets include plant and equipment, inventory, accounts receivable etc as well as other current assets. The total

asset

turnover

ratio

calculates

net

sales

as

a

percentage of assets to show how many sales are generated from each unit of company assets, and it is calculated by dividing net sales by average total assets. 38

Total Assets Turnover =

Net Sales

Average Total Assets. Since ratio measures how efficiently a firm uses its assets to generate sales, so a higher ratio is always more favourable. Higher turnover ratios mean the company is using its assets more efficiently. Lower ratios mean that the company is not using its assets efficiently and most likely have management or production problems. The total asset turnover ratio is also a general efficiency ratio that measures how efficiently a company uses all of its assets. This gives investors and creditors an idea of how a company is managed and uses its assets to produce products and sales. 2.4.4 Profitability Ratio A profitability ratio is a measure of profit which is way to measure a company’s performance. It is the capacity to make profit, and profit is what is left over from income earned after deducting all costs and expenses related to earning of the income. In general, profitability ratios measure the efficiency with which a firm turns business 39

activity into profits. According to Hussain et al (2013), profitability

ratios

indicate

the

overall

efficiency

and

performance of firm. Some of the major profitability ratios are as follows: i. ii. iii. iv. v.

Gross profit margin Net profit margin Return on Assets Return on Equity Earning Power Ratio.

GROSS PROFIT MARGIN: Gross profit margin is a financial metric used to assess a firm’s financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. It is used as an indicator of a business’s financial health. It shows how efficiently a business is using its material and labour in the production process and gives an indication of the pricing, cost structure, and production efficiency of the business. Gross profit margin serves as the source for paying additional expenses and future savings. It is calculated as gross profit divide by total revenue. Gross Profit Margin = Gross Profit 40

Total Revenue. Gross profit margin shows the total increase between cost of goods sold and sales revenue. It also reflects the efficiency with which the management produces each unit of product (Brealey& Myers 1984). NET PROFIT MARGIN: Net profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends have been deducted from a company’s total revenue. Net profit margin signifies the overall measure of a company’s ability to turn each unit of sales into net profit. It also establishes relationship between sales and net profit. It indicates management’s efficiency in administrating, manufacturing and selling the products (Brealey& Myers 1984). Net profit margin is calculated by dividing net profit by total revenue. Net Profit Margin = Net Profit Total Revenue

41

This is often used to compare companies within the same industry, in a process known as “margin analysis”. Net profit margin is a percentage of sales, not an absolute number, so it can be extremely useful to compare net profit margins among a group of companies to see which are most effective at converting sales into profit (investinganswers.com). RETURN ON ASSET: Return on assets is the ratio of annual net income to average total assets of a business during a financial year. It measures efficiency of the business in using its assets to generate net income. According to Sharma (2012), return on assets ratio shows how competently total assets has been utilized by the company. It also indicates the overall rate of return on total assets of the firm. To determine return on total assets, net income is compared with total assets of the company. It is calculate as annual net income divide by average total assets. Return on Asset = Annual Net Income Average Total Assets

42

Return on assets indicates the number of percent earned on each value of assets. Thus higher values of return on assets show that business is more profitable. This ratio is only used to

compare

companies

in

the

same

industry

(accountingexplained.com). RETURN ON EQUITY: Return on equity is the amount of net income returned as a percentage of shareholders equity. According to Hussain et al (2013), return on equity ratio demonstrates

how

efficiently

firms

utilize

common

stockholders’ equity in company. It measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. Return on equity is expressed as a percentage and is calculated

as

annual

net

income

divide

by

average

stockholders’ equity. Return on Equity =

Annual Net Income Average stockholders’ Equity

Return on equity is an important measure of the profitability of a company. Higher values are generally favourable 43

meaning that the company is efficient in generating income on new investment. Investors should compare the return on equity of different companies and also check the trend in return on equity over time (accountingexplained.com). EARNING POWER RATIO: Earning power ratio is measure that calculate the earning power of a business before the effect of thebusiness income taxes and its financial leverage. It indicates the raw earning power of the company’s assets before the pressure of taxes and debts (Hussain et al 2013). It is calculated by dividing earnings before interest and taxes (EBIT) by total assets (Brigham & Houston 2009). Earning Power Ratio = EBIT Total Assets Earning power ratio is similar to return on assets as both have the same denominator which is total assets. 2.5 Objectives of Financial Ratio Analysis Before starting the analysis of any firm’s financial statements, it is necessary to specify the objectives of the 44

analysis. According to Fraser and Ormiston (2004), the objectives will vary depending on the perspective of the financial statement user and the specific questions that are addressed by the analysis of the financial statement data. Among the several perspectives is that of the creditor, the

investor,

and

the

management.

Each

of

these

stakeholders would have to have questions that need to be answered. For instance, a creditor is usually concerned with the ability of an existing or prospective borrower to make interest and principal payments on borrowed funds. The investor usually attempts to arrive at an estimation of a company’s future earnings stream in order to attach a value to

the

securities

being

considered

for

purchase

or

liquidation. Lastly, financial statement analysis from the standpoint of management relates to all of the questions raised by creditors and investors because these user groups must be satisfied in order for the firm to obtain capital as needed.

45

According to Brigham and Houston (2009), financial analysis involves comparing the firm’s performance to that of other firms in the same industry and evaluating trends in the firm’s financial position over time. One rich source of information for financial statement analysis is the audited financial statements. The financial statements are usually part of the annual report that listed companies submit to regulatory

agencies

such

as

Securities

and

Exchange

Commission and Stock Exchange entities. Ratio analysis as a basis of appraising financial performance uses financial reports, data and summaries of key relationships such as profit of sales, earnings per share, dividends yield, net profit margin and many other ratios that are important to the analysis (Omoregie et al 2014). Reliance on certain ratio depends on the analysis perception of their predictive power relating to the problem at hand, a perception based on either subjective belief or empirical analysis. Randle (1991) suggests that in predicting the future value of a stock, an investor might feel that the return on

46

investment ratio and profit margin ratio would be the greatest help. Financial ratios to predict corporate bond rate; with these ratios as the dependent variables, regression analysis and discriminate analysis have been employed, using various financial ratios for a sample companies. The best ratios for predictive purpose are debt to equity, cash flow to debt, net operating profit margin, debt average and its stability (Omoregie et al 2014). On the basis of these, it appears that a handful of ratio can be used to predict the long-term credit standing of a firm. According to Sangster (1996), a financial analyst will want to estimate a security’s future sensitivity to major factors and unique risk because the information is to determine the risk of investment. Perhaps the analyst will also want to estimate the dividend yield of a security over the next year in order to determine its suitability for investors in which dividend yield is relevant. Careful analysis of such matters as a company’s dividend policy and likely

47

future cash flow may lead to better estimates that can be obtained by extrapolating last year’s dividend yield. In many cases, it is desirable to know something about the source of a security’s risk on return. 2.6 Significance of Ratios The ratio analysis is the most powerful tool of the financial analysis. As stated earlier in this study, many diverse groups of people are interested in analyzing the financial information to indicate the operating and financial efficiency and growth of the firm. These people use ratio to determine those financial characteristics of the firms in which they are interested. A wise and prudent investor takes into consideration; however that can sustain his interest to invest in a company or to remain through the retention of his shares (Collins and Johnson, 1999) some of these factors are: (i) (ii) (iii) (iv) (v)

Security Liquidity Returns Spread risks Growth prospects

48

There is a connection between profitability, liquidity and solvency. Poor profitability leads to illiquidity. Illiquidity leads to bankruptcy or insolvency. Insolvency leads to liquidation. Profitability companies can become illiquid without good cash

management.

Profitability,

liquidity

and

solvency

problems can be curved with vigilant financial management and strong strategic planning (Collins and Johnson 1999). Here are the achievement and significance of ratios as enumerated by (Collins and Johnson, 1999). 2.7 Weakness and Limitations of Ratio Analysis Ratio analysis is a widely used technique to evaluate the financial position and performance of a business. But there are certain problems in using ratio. Argent (1977) has drawn attempt three limitations of financial ratio analysis which restricts the usefulness of financial ratio for predicting business failure in the following terms. (i)

The ability of ratio alone to predict corporate collapse has not been conclusively proves.

49

(ii)

Their value may have been eroded by inflation figure that appear to show an improvement out may actually

conceal deterioration in real terms. (iii) Managers start “creative accounting” when they perceive or know that things are wrong thus in hiding the fell-face symptoms. Creative accounting involves making the company’s result look better than there are for example, by cutting expenditure on routine maintenance. This phenomenon explains why so many people do not appreciate the serious difficulties of suspect companies until the day the solvency is announced. Patron and Paton (1964) added “ratios are not a satisfactory substitute for judgment their calculation is nothing more than a means of focusing attention on relationship that are worth of careful observation and study. They are therefore dues and not basis for immediate conclusion.

50

Olowe (1997) conclude “the ratio calculate at a point of time are less “informative and defective as they suffer shortterm changes”. Thus, they are of little value in predicting future result. The limitations of ratio include the following: 1. It may be difficult to obtain a suitable yardstick for comparison where a company operates a number of different division in different industries establishing a standard of comparison in a difficult task. 2. The number of various ratios is so large i.e. that is a very difficult task to select some appropriate ratios for various business units. 3. In carry out trend analysis, the analysis could be affected by: a. Changes in the nature of business from one accounting period to the other. b. Changes in accounting policies from one period to the other. c. Changes in government incentive package. 4. The various formulae for working out ratios have also been taken as standard formulae. Ratios are work out on the basis of different items and different industries.

51

5. When undertaking cross sectional analysis identifying companies that are comparable for the following reasons may be difficult. a. The companies may have different accounting policies b. To companies may have different degree of diversification 6. In general, it is incorrect to compare small firm with large firm, many of the general industrial analysis of ratios are overall average and therefore not strictly comparable to any particular firm. The above weakness and limitations are not all that withstanding to outrun the significance of ratio analysis as that cannot be ruled out in any form whatsoever. 2.8 Performance Evaluation Using Financial Ratios The performance evaluation is considered as the final step in a series of the administrative process where the administrative process starts by identifying the desired objectives as a result of administrative unit, and then a plan is prepared to achieve these objectives followed by the

52

controlprocess over the implementation in order to identify the deviations of the actual results of what the plan and the objectives identifies as expected results and the control process leads the evaluation process (Abdel &Dalabeeh). According to Keith (1987), performance evaluation always exist and always has in any group, a person’s performance tends to be judged in some way by others, appraisal is necessary in order to allocate resources in a dynamic environment, reward employees, give feedback, maintain fairness, coach and develop employees towards attainment of goals. The process of evaluation is the most difficult administrative tasks because it includes many different variables, some are descriptive and others are personal and because of this, it seems difficult to measure the performance (Abdel &Dalabeeh 2013:13). But having standards

for

evaluating

the

performance

means

the

availability of a physical measurement could be applied for the individuals.

53

According to Kahala&Hanan (1998), evaluating the performance is one of the systematic control steps of the costs and these costs include the following: i.

Preparing the Approach: this step I done at the level of

ii.

planning. The Control: this step starts at the beginning of the implementation level and continue till the actual

iii.

implementation level is over. The Judgment: to evaluate the performance and

iv.

identify the level of the efficient productivity. The Treatment: writing a report of the

urgent

deviations and their causes to decisions as a treatment for them. 2.9 Review of Empirical Studies Enekwe, Okwo and Ordu; (2013) investigated financial Ratio analysis as a determinant of profitability in Nigerian pharmaceutical industry. The study incorporated variables such as Inventory Turnover Ratio (ITR), Debtors Turnover Ratio (DTR), Creditors Velocity (CRSV), Total Asset Turnover (TAT) and Gross Profit Margin (GPM) to analyze the financial

54

statements of the selected companies. Findings revealed that financial ratios have a negative relationship with the profitability of companies. Boune and Neely; (2003) examined implementing performance measurement system: a literature review the paper reviews the different performance measurement system; design processes published in the literature and create a framework for comparing alternative approach. He concludes that performance measurement literature was at the stage of identifying difficulties and pitfalls to be avoided based on practitioner experience with few published studies. Mais; (2005) studied the effect of financial ratios such as Net Profit Margin (NPM), Return on Assets (ROA), Return on Equity (ROE), Dividend Earned Ratio (D/E) and Earning per Share (EPS) on stock price of companies listed on Jakarta Islamic Index. The outcome of this research explains that statistically all variables except Dividend Earned Ratio are significant and have positive impact on stock price.

55

In Indonesia, Daniati and Suhairi, (2006) studied the use of accounting information for predicting returns. His findings revealed that cash flow from investing activities, gross profit and company size significantly affect expected return on shares, on the other hand, cash flow from operating

activities

does

not

affect

expected

return

significantly. Meythi, (2006) studied 100 manufacturing firms in BEJ during 1999-2002 and conclude that, with profit persistence as intervening variable, cash flow from activities does not affect stock price. Kennedy; (2005), Analyzed the effect of ROA, ROE, EPS, Profit Margin, Assets Turnover, DTA and DER on stock return using sample of stocks from LQ 45 index in BEJ during the period 2001-2002. This research find out that TATO, ROA, EPS, and DER have positive effect, while ROE and Debtors Turnover have negative effect on stock return, however all variables statistically insignificant in influencing stock return.

56

Rosewati; (2007), studied the effect of CR, TATO, DER, ROE, EPS and PBV on stock price of manufacturing industry with five sub-industries including retail, food and beverages, tobacco, automotive and pharmacy, the result shows that, the significant financial ratios in retail industry are ROE, EPS, and PBV, in food and beverages are EPS and PBV, in tobacco industry are CR, TATO, DER EPS, and financial ratios are TATO, DER, EPS and PBV. Hamzah;

(2003),

Analyzed

correlation

between

Financial Ratios, including Liquidity Ratio (Current Ratio), Profitability Ratio (Return On Investment), Activity Ratio (Total Asset Turnover) and Solvability Ratio (Debt to Equity), and

both

capital

gain

(loss)

and

dividend

in

135

manufacturing companies listed on Jakarta stock exchange. This

research

discovers

that

all

ratios

have

positive

correlation with gain (loss). However only current ratio that was

statistically

significant

at

5%.

Furthermore,

the

correlation with dividend yield, only Total Asset Turnover that is proved significant at 5%.

57

Dwi, Malone and Rahfiani; (2009), studied the effect of financial ratio, firm size and cash flow from operating activities in the interim report to the stock return using 39 manufacturing companies listed on Indonesia Stock Market. The result shows that profitability, Turnover and Market ratio has significant impact to the stock turnover.

58

CHAPTER THREE RESEARCH METHODOLOGY 3.1 Introduction This chapter examines the methodology that will be adopted in achieving the study’s stated objectives. The chapter therefore focuses on the research design, the population of the study, the study sample and the sampling techniques. The chapter also covers sources of data collection,

techniques

of

data

analysis,

definition

of

variables, model specifications and the limitations of the study. 3.2 Research Design This study employs the descriptive and comparative research approach of paired t-test in the investigation. The reason for the study adopting the descriptive research 59

design is due to its ability to offer a snapshot of current situation or conditions. Also, thecomparative research design method fits into this study because the study searches for answers to some questions as to whether profitability ratios are better measure of performance of commercial banks as compare to leverage and liquidity ratios.

3.3 Population of the Study The population of this study comprises of all the 21commercial banks quoted on the Nigerian stock exchange (NSE) as of December 2014. 3.4 Sample Size of the Study. This study purposively selects four (4) money deposit banks namely Access BanksPlc, Sterling Bank Plc, EcoBankPlc, First city monumental bank (FCMB) to constitute the sample size for the study. The choice of these banks is due to the easy accessibility of annual published reports for all the years under investigation.

60

3.5 Sources of Data The main sources of data for this study are secondary data.

Secondary

data

in

respect

to

variables

under

investigation were sourced from the annual published accounts of the selected money deposit banks from the year 2009-2013. 3.6 Definition of Variables Employed in the Study Profitability Ratios:A profitability ratio is a measure of profit which is way to measure a company’s performance. It is the capacity to make profit, and profit is what is left over from income earned after deducting all costs and expenses related to earning of the income. In general, profitability ratios measure the efficiency with which a firm turns business activity into profits. Profitability used in this study includes: net profit margin (NPM), Return on Assets (ROA) and return on equity (ROE). Liquidity Ratios: Liquidity ratios measure the firm’s ability to meet its current obligation. Liquidity ratio used in this study includes: working capital (CA-CL) and net worth to total asset (NW/TA).

61

Leverage Ratios:These ratios can be called long-term solvency ratios. Leverage ratios involve the obligations a company holds along with the shareholder’s equity. It is used to show the firm’s ability to meet its financial obligations. Leverage ratio used in this study includes:Loan to total deposit (L/TD) and capital adequacy ratio (CAR(SE/TD). 3.7 Techniques of Data Analysis This study is set to examine whether profitability ratios are better measure of performance of money deposit banks as compare to liquidity and leverage ratios. In order to achieve these objectives, the study adopts majorly the use of descriptive statistics to summarize the collected data in a clear and understandable way using numerical approach. Furthermore, paired sampled t-test was further adopted in the analysis of data. Data in respect to profitability ratios, liquidity ratios and leverage ratios was taken as a separate pair. Profitability ratios were compared with liquidity and leverage ratios using the independent paired sampled t-test.

62

This was done with the aid of the statistical package for social science (SPSS) version 20. Decision rule This study establishes the following criteria to accept and reject the research hypotheses.  Accept the null hypothesis if the critical value of t under 0.05 in the t-table is greater than the calculated value.  Reject the null hypothesis if the critical value of t under 0.05 in the t- table is less than the calculated value.

CHAPTER FOUR DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS 4.1 Introduction This study examines whether there is a significant difference in the performance of commercial banks in Nigeria

63

when measured using profitability ratios and liquidity ratios and profitability ratios and leverage ratios. In this regard, this chapter therefore presents findings from data analysis using the research methodology lucidly explained in chapter three. Specifically, this chapter presents data and results of the paired sample descriptive statistics analysis, paired sample correlation and paired sampled t-test, testing of hypotheses and finally discussion and interpretation of findings. Data analysis herein will be done with the aid of the Statistical Package for Social Sciences (SPSS version 20). 4.2 Data Presentation and Analysis Table 4.1 (See Appendix 1) presents aggregate data extract of all commercial banks in Nigeria from the period 2009-2013 in respect to all the variables under examination. A five year average was taken in respect to all the classes of ratios in order to observe the trend in performance of each commercial bank using ratios. These analyses are performed below: Profitability Ratios 64

Banks

Years

ACCESS BANK PLC

20092013 20092013 20092013 20092013

STERLING BANK PLC ECO-BANK PLC FCMB

5 year Average ROA 2.14%

5 year Average ROE 1.07%

5 year Average OPM 34.20%

1.72%

19.36%

21.03%

2.66

20.06%

34.28%

1.20

6.44%

18.52%

Return on Assets (ROA) This is the ratio of Net profit to total assets. It also indicates whether the total assets of the company have been properly used or not. If not properly used, it proves inefficiency on the part of the management. It also helps measure the profitability of the firm. Return on Assets =

Profitbefore Tax Total Assets

The 5 year average performance of the banking industry in Nigeria as far as the Return on Assets is concerned is given onthe table above. The figures are then compared with the individual performance of the four selected banks. Generally, all the banks had a very poor average ROA over the five year period. Again,there is not much difference 65

between the performances of the banks using ROA.A cursory look at the table revealed that Eco-bank has the highest ROA of 2.66% while FCMB has the lowest ROA of 1.20%. This implies that during the period under study, Eco-Bank recorded the highest profitability among the selected banks while FCMB achieved the lowest profit. Return on Equity (ROE) This is calculated by dividing the net profit after tax by the shareholder’s equity. This ratio is applied for testing profitability. The higher the ratio, the better is the return for the ordinary shareholders. Return of Equity =

Net Income Shareholders’ Equity

The table below shows the trend of average ROE in the Nigerian banking industry from 2009-2013, this is then compared to those of the four individual banks under review. The return on equity is generally low for all the banks over the five year period. As usual, Eco-Bank has the highest return on equity of 20.06%. That is, for every 1 naira of shareholder’s equity, the bank is able to generate a net 66

profit of 20.06%. This is quite low. Sterling bank and FCMB followed with a five year average ROE of 19.36% and 6.44% while Access bank has the least ROE of 1.07%. Net Profit Margin This is the ratio of net profit to net sale, and is also expressed as a percentage. It indicates the amount of sales left for shareholders after all costs and expenses have been met. It is the difference between gross profit and operating and

non-operating

income

minus

operating

and

non-

operating expenses after deduction of tax. The ratio measures

the

overall

efficiency

of

the

management.

Practically, it measures the firm’s overall profitability.If the ratio is found to be too low, many problems may arise, dividend may not be paid, operating expenses may not be paid etc. Moreover, higher profit earning capacity protects a firm against many financial hindrances such as adverse economic condition. The higher the ratio, the greater will be profitability, and the higher the return tothe shareholders. 5% to 10% may be considered normal.

67

Net Profit Margin = Net Profit (Before Tax) Sales The table above revealed that Eco-Bank has the highest net profit margin of 34.28% followed by Access Bank and sterling bank with a NPM of 34.20% and 21.03% respectively while FCMB has the least NPM of 18.52. Generally all the commercial bank in the industry could be adjudged to have a poor net profit margin. Liquidity Ratios Banks ACCESS BANK PLC STERLING BANK PLC ECO-BANK PLC FCMB

Years

5 year Average CR

5 year Average NW/TA

2009-2013 2009-2013 2009-2013 2009-2013

1.17 1.10 0.95 1.22

0.21 0.09 0.12 0.23

Current Liquidity Ratio It is the relationship between the amount of current assets and the amount of current liabilities. It is essentially a tool for measuring short-term liquidity and solvency position of firms. In other words, it may be stated that this ratio is taken to measure the margin of safety of current assets over current liabilities that the management of a company maintains

obtaining

business 68

finance

from

short-term

sources. Generally, a 2:1 ratio is considered normal. That is for every two units of current assets, there is only one unit of current liability. The reason for prescribing 2:1 current ratio is that all the current assets do not have the same liquidity, or in short, all the current assets cannot be immediately converted into cash. The other logic for prescribing 2:1 current ratio can possiblybe the fact that a surplus of current assets will remain in the firm as Working Capital even if all current liabilities are liquidated by it at the close of its accounting cycle. As with other ratios, there is no best answer for any particular company and it is the trend in this ratio which is more important. If the ratio is worsening over time, and especially if it falls to less than 1:1, the observer would look closely at the cash flow. Liquidity Ratio = Current Assets Current Liabilities All commercial banks sampled for this during the period under investigation were unable to attain the required current ratio of 2:1, or at least the 1:1. The table above revealed a highest liquidity ratio of 1.22 in respect to FCMB 69

followed by Access bank and sterling bank with a liquidity ratio of 1.17 and 1.10 respectively. Eco-Bank which has a better performance using both profitability and liquidity ratios has a very low current ratio of 0.95. This implies that all the banks have not maintained enough current assets to meet their short term financial assets as and when they fall due. The management of the banks in most cases were prudent enough to have kept more than one naira of current assets ready to pay for every one naira of current liabilities that may fall due. Current Liquidity Ratio measures the ability (available short-term funds) of the firm to meet its short-term financial obligations as and when they fall due. Net Worth to total Assets The net worth to total assets measures the total asset contribution to the total worth of the company during the period under investigation. The table above revealed the highest net worth to total asset of 0.32 in respect to FCMB followed by Access Bank and Eco-Bank with 0.29 and 0.17 respectively. Sterling bank has the least net worth ratio of 70

0.09. these values revealed poor contribution of total assets in financing the operations of the Company. Leverage Ratios Banks ACCESS BANK PLC STERLING BANK PLC ECO-BANK PLC FCMB

Years

5 year Average L/TD

5 year Average CAR

2009-2013 2009-2013 2009-2013 2009-2013

1.77 1.49 0.56 1.75

0.32 0.11 0.17 0.29

Leverage ratios are ratios used to calculate the financial leverage of a company to get the idea of the company’s method of financing or to measure its ability to meet its financial obligation.

Loan to Total Deposit Also known as LTD ratios, is a ratio between the banks total loans and total deposits. If it is lower than 1, the bank relied on its own deposit to make loans to its customers without any outside borrowing. If on the other hand the ratio is greater than 1, the bank borrowed money which is re-

71

loaned at higher rate rather than relying entirely on its own deposits. Banks may not be earning optimal returns if the ratio is too low. If the ratio is too high, banks might not have enough

liquidity

to

cover

any

unforeseen

funding

requirements or economic crises. It is a commonly used statistics for assessing bank liquidity. The table above revealed the highest LTD ratio of 1.77 in respect to access bank, followed by FCMB and sterling bank with an LTD ratio of 1.75 and 1.49 respectively. Eco-Bank has the lowest LTD ratio of 0.56. The implication of this data is that even though, the three banks (Access Bank, FCMB and Sterling Bank) might not have enough liquidity to cover any unforeseen funding requirements or economic crises since their ratios are slightly above 1, the three bankswere able to borrowed money which were re-loaned at higher rate rather than relying entirely on its own deposits. While in case of EcoBank, the data in the table further shows that the bankwas not earning optimal returns since the ratio was too low (i.e. less than 1). 72

Capital Adequacy Ratios Also known as capital to risk (weighted) assets ratio (CRAR). This is the ratios of a bank’s capital to its risks. National regulators track a bank’s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory capital requirement. This ratio is used to protect depositors and promote the stability and efficiency of the financial system around the world. The data in the table above reveal the highest capital adequacy ratio of 0.32 in respect to Access Bank followed by FCMB and Eco-Bank with CAR of 0.29 and 0.17 respectively. Sterling Bank has the lowest CAR of 0.11. This implies that the banks under study here cannot absorb a reasonable amount of loss and thus does not comply with statutory capital requirements. 4.2.1 Presentation of Results This section of the chapter presents and analyses data collected from the annual audited accounts of selected banks in respect to the variables employed in the study from the period 2009-2013. 73

Data in respect to profitability ratios, liquidity ratios and leverage ratios were taken as a separate pair and inputted in the statistical package for social sciences (SPSS) version 20 to compute the paired sample t-test. The output is herein presented below: Table 4.1: Paired Samples Statistics Pair 1 Pair 2 Pair 3 Pair 4

ROA CR ROA NW ROA LTD ROA CAR

Mean .0187 1.1099 .0187 .1677 .0187 .6429 .0187 .2249

N 20 20 20 20 20 20 20 20

Std. Deviation .01321 .15033 .01321 .10004 .01321 .18249 .01321 .11411

Std. Error Mean .00295 .03361 .00295 .02237 .00295 .04081 .00295 .02552

Source: SPSS Version 20 Output

The mean value of the return on assets (ROA) that measures how much a bank is able to generate for each naira in asset stood at 0.0187% with a fluctuation of 0.01321% while the mean of current ratio which indicates the ability banks to meet their current obligations effectively with the liquid assets (CR) stood at 1.1099 with a fluctuation of 0.15033. This reveals a higher mean in respect to CR in comparison to ROA. The standard deviation between ROA and CR indicates that the volatility is higher in respect to capital adequacy ratio. 74

The poor performance in terms of ROA further indicates that in spite of the asset intensity, banks could not utilize them well to generate comparable revenue to justify the increase in assets resulting from various banking sector reforms such as the mergers and acquisition. The mean of net worth to total assets (NWTA) stood at 0.1677 in with a fluctuation of 0.10004. This reveals that the assets were financed more with shareholders equity funds. This is a plausible condition when related to the analysis of ROA which has a much lower mean of 0.0187. The mean of loan to deposit (LTD) ratio reflect a mean of 0.6429 with a fluctuation of 0.18249. In spite of this mean been much higher than the mean of ROA, it further reveals that commercial banks are yet to achieve a more stable financing mix. The mean capital adequacy ratio (CAR) of 0.2249 represents the funds provided by shareholders for the financing of the banks’ operations as against the customers‟ deposits. This may be interpreted that the banks are more at risk of dependency on external funding because the 75

operations are funded more with customers’ deposits that can be demanded for at any time and less of equity. This mean is however higher than the mean of ROA which indicates that capital adequacy ratios reflect a higher performance measure. The interpretation of the descriptive statistics implies that the financial performance of commercial banks has deteriorated, and became riskier. Therefore, the results show that in each pair, liquidity and leverage ratios reflect a mean very much higher than profitability ratios. Table 4.2: Paired Samples Correlations N

Correlation

Sig.

Pair 1

ROA & CR

20

-.293

.210

Pair 2

ROA & NW

20

.455

.044

Pair 3

ROA & LTD

20

-.135

.570

Pair 4

ROA & CAR

20

.068

.776

Source: SPSS Version 20 Output

Table 4.2 above presents the paired sample correlation for all the variables under investigation. The correlation results above revealed a very weak and insignificant relationship between return on assets (ROA), current ratio (CR), loan to deposit (LTD), capital adequacy ratio (CAR) and

76

net worth to total assets (NWTA). However, the correlation results revealed a weak and significant relationship between profitability ratio liquidity and leverage ratios. However, the mean net worth (NW) indicate a weak but significant relationship between ROA and NW

Table 4.3: Paired Samples Test Paired Differences Mean

Std. Deviation

Std. Error Mean

t

Df

Sig. (2tailed)

95% Confidence Interval of the Difference Lower Upper

Pair 1

ROA – CR

-1.09121

.15472

.03460

-1.16362

-1.01879

-31.541

19

.000

Pair 2

ROA – NW

-.14897

.09476

.02119

-.19332

-.10462

-7.031

19

.000

Pair 3

ROA – LTD

-.62418

.18474

.04131

-.71064

-.53772

-15.110

19

.000

Pair 4

ROA – CAR

-.20616

.11398

.02549

-.25951

-.15282

-8.089

19

.000

Source: SPSS Version 20 output The table 4.3 presents the result of the paired sample ttest return on assets (ROA), current ratio (CR), and net worth to total assets (NWTA) loan to deposit (LTD) and capital adequacy ratio (CAR) of Nigerian commercial banks. The result reveals an overall mean and standard deviation in respect to return on assets (ROA) and current ratio (CR), with a fluctuation of 2.064%. The calculated t77

value at a degree of freedom of 19 stood -31.541. The level of significant is estimated at 0.000 which is more than 0.05 or 5% level of significant for a two tailed test thus indicating that the test is statistically significant. Also, the result reveals an overall mean and standard deviation in respect to ROA and NW to be –0.14897 with a fluctuation of 0.09476%. The calculated t-value at a degree of freedom of 19 stood at -7.031. The level of significant is estimated at 0.000% which is less than 0.05 or 5% level of significant for a two tailed test thus indicating that the test is statistically insignificant. More so, the result reveals an overall mean and standard deviation in respect to ROA and LTD to be -0.62418% with a fluctuation of 0.18474. The calculated tvalue at a degree of freedom of 19 stood at -15.110. The level of significant is estimated at 0.000% which is less than 0.05 or 5% level of significant for a two tailed test thus indicating that the test is statistically insignificant.

78

Finally, the result reveals an overall mean and standard deviation in respect to ROA and CAR to be -0.20616 with a fluctuation 0.11398. The calculated t-value at a degree of freedom of 19 stood at -8.089. The level of significant is estimated at 0.000 which is less than 0.05 or 5% level of significant for a two tailed test thus indicating that the test is statistically significant. 4.3 Test of Hypotheses This section of the chapter provides a test of the research hypotheses. Table 4.3 displays the calculated tvalues for all variables paired and their level of significance. These level of significance shall be used to compare with 5% level of significance for a two tailed test to enable a decision to be made as to whether to accept or reject the study’s formulated hypotheses. The criteria for the acceptance and rejection of the study’s null hypotheses will be done in line with the study’s decision rule earlier formulated in chapter three. 4.3.1 Test of Research Hypothesis One

79

Ho1: There is no significant difference in performance of commercial banks when measured using Profitability ratios and liquidity ratios. Given that the critical value of t is 2.093 (see appendix ii) and the calculated t-values for liquidity ratios (CR and NW) are -31.541 and -7.031 respectively (see table 4.3) which lies outside the region of acceptance, the researcher therefore rejects the null hypothesis and conclude that there is a significant difference in performance of commercial banks when measured using Profitability ratios and liquidity ratios. 4.3.2 Test of Research Hypothesis Two Ho2: There is no significant difference in performance of commercial banks when measured using Profitability ratios and leverage ratios. Given that the critical value of t is 2.093 (see appendix ii) and the calculated t-values for the pair of profitability (ROA) and leverage ratios (LTD and CAR) are -15.110 and -8.089 respectively (see table 4.3) which lies outside the region of acceptance, the researcher therefore rejects the null hypothesis and conclude that there is a significant difference

in

performance

of

commercial

banks

measured using Profitability ratios and leverage ratios. 80

when

4.4 Discussion of Findings This study examined the use of financial ratios as a tool for measuring organizational performance. To do this, the study groups the financial ratios under three categories: profitability ratios, liquidity ratios, and leverage ratios. In the first objective of the study which seeks to investigate the use of ratios in the evaluation of financial performance of commercial banks in Nigeria, the finding from the observation of the data presented reveal that performance of commercial banks on a general note could be adjudged to be poor especially when observed using profitability ratios, liquidity ratios and leverage ratios. In the test of the first hypothesis of the study which seeks to examine the extent of the difference in the performance of commercial banks when measured using profitability ratios and liquidity ratios, the result of the test reveals that there is a significant difference in performance of commercial banks when measured using Profitability ratios and liquidity ratios. This finding is further affirmed by 81

the result of the descriptive statistics which revealed the highest mean in respect to liquidity ratios as compared to profitability ratios. This implies that liquidity ratios are a better

measure

of

performance

of

commercial

banks

especially when compared with profitability ratios. Also, the result of the test of the second hypothesis of study which seeks to examine the extent of the difference in the performance of commercial banks when measured using profitability ratios and leverage ratios, the result of the test reveals that there is a significant difference in performance of commercial banks when measured using Profitability ratios and leverage ratios. This finding is further affirmed by the result of the descriptive statistics which revealed the highest mean in respect to leverage as compared to profitability ratios. This implies that leverage ratios are a better

measure

of

performance

of

commercial

banks

especially when compared with profitability ratios. These findings are consistent with findings of Boune and Neely; (2003)

who

examined

implementing

performance

measurement system and concludes that liquidity ratios are 82

better measure of business performance as compared to profitability ratios.

83

CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.1 Summary This study was carried out to empirically access the use of financial ratios as a tool measuring business performance. The

study

specifically

sought

to

examine

whether

profitability ratios reflect a better measure of performance as compared to liquidity ratios and leverage ratios. The followings are the summary of major findings of this study. 1 The performance of commercial banks when evaluated using profitability ratios liquidity ratios and leverage ratios,

during

the

period

under

study

could

be

adjudged to be abysmal. 2 There is a significant difference in the performance of commercial banks when measured using profitability ratios and liquidity ratios. Thus, liquidity ratios are better measure of performance of commercial banks when compared with profitability ratios. 3 There is a significant difference in the performance of commercial banks when measured using profitability ratios and leverage ratios. Thus, leverage ratios are

84

better measure of performance of commercial banks when compared with profitability ratios. 5.2 Conclusion Financial

statements

contain

lots

of

information

summarized in figures. Viewed on the surface, they do not provide enough information about the validity of the reporting entity. Thus, they need to be analyzed by means of financial ratios to unveil the mass truth hidden in them, and to enhance decision making. This study investigate the use of ratios in evaluating the financial performance of commercial banks in Nigeria with the view of ascertaining whether there is a significant difference in the performance of commercial bank in Nigeria when measured using profitability ratio, liquidity ratios and leverage ratios. In line with the findings of this study, the researcher

therefore

comes

to

the

conclusion

that

commercial banks in Nigeria have performed abysmally as evaluated using financial ratios and that there is a significant difference in the performance of commercial bank when

85

performance is accessed using profitability ratios, liquidity and leverage ratios. 5.3 Limitations of the Study The following are the potential limitations of the study that should be taken into considerations. The research was mainly conducted using secondary data. The other data collection methods had not been considered as a result there may not be 100% accuracy. In addition to this, data representing the period of 2009 to 2013 were used for the study. The research has compiled a large database of Nigerian commercial banksdata that demonstrate what can be done even with the limitations of currently available data. 5.4 Recommendations In line with the findings of the study, the following recommendation has been put forward. Management of commercial banks in Nigeria should make it mandatory to monitor performance using financial ratios as financial ratios helps to identify at the early stage the health status of business organizations. 86

The

management

of

commercial

banks

should

endeavour to employ accountants and other financial experts who are vast in the area of financial ratio analysis as financial analyst of the company. Such analysts should be trained from time to time to help update their knowledge. 5.5 Suggestions for Further Research At this juncture I would like to categorically state here that this study does not provide an end to the examination of the use of ratios as a tool for measuring the performance of organization using ratio analysis, rather it is a means to an end.

The

study

therefore

suggests

that

prospective

researchers should examine other forms of ratios such as cash flow ratio not adequately examine in this study. More so, this study made use of a very large firm (commercial banks) hence any further research in this form should be directed towards small scale enterprises which predominate the Nigerian business climate.

87

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Charles, T. H. & Walter, T.H. (1999).Accounting; Fourth Edition; UK: Prentice hall International. Chordia, T.&Asani, S. (2005). An Empirical Analysis of Stock and Bond Market Liquidity.The Review of Financial Studies, 18(1), 86-129. DwiMartani, M.&Rahfianikhairurizka (2009).The Effect of Financial Ratios, Firm Size and Cash Flow from Operating Activities in the Interim Report of the Stock Return .Chines Business Review Journal, 8(6). Enekwe, C. I., Okwo I. M. &Ordu, M. M. (2013).Financial Ratio Analysis as a Determinant of Profitability in Pharmaceutical Industry.International Journal of Business and Management, 8(8). Fraser, L.&Ormiston, A. (2004).Understanding Financial Statements, New Jersey: Pearson Prentice Hall. Gerald, I.W. (1997). The Analysis and Use of Financial Statement; Second Edition, New York, USA: Quorum Books. Hatami-Shirkouhi, L., Mehran, N. &Homa, S. (2012). Investigating the Effect of Financial Indices on Cement Companies’ Performance using Fuzzy Mcdm. Indian Journal of Innovations and Developments. Hourgren, T.C. (1961). Accounting for Management Control, An Introduction; Third Edition; USA: South-Western College Publishing. Hussain, M. &Bahadar, S. (2013). Comparative Evaluation of Financial Performance of Pakistan Tobacco Company (PTC) and Philip Morris Pakistan Limited (PMPKL) through “Ratio Analysis” In International Journal of Management Sciences and Business Research, 3(1). Ibiayo M. I. (2004). Financial Accounting Books for College university student.Lagos: Emmanuel Publishers.

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Igben, R. O. (1999). Financial Accounting Made Simple. ROI Publishers, Lagos. Ilaboya, O.J. (2005). Advanced Financial Accounting,Ibadan: Dalog Prints and Packaging United. Issa, H. (2012). Rating of Iranian Cement Companies based on Financial Ratio Analisis. Life science Journal,9(4). Jennings, A.R. (1993). Financial Accounting,London: D.P Publication, Joe, L. (2012). Financial Ratios for Analyzing a Company’s Strengths and Weaknesses,AAII Journal, 53(2). Johnson, U. O. (1992).Introduction to Project Writing for Business and Financial Accounting Students.1st edition.Sammy Enterprises, Lagos. Kahala, J. &Hanan, R. (1998). Standard Cost Accounting: Control and Proof, Second Edition, Ammani, Jordan: Dar Athagafafor Publishing and Distribution. Keith,

D. (1987). Human Behaviour at Work: OrganisationalBehaviour, Glolier Business Library, USA:McgrawHill Inc, 543-544.

Khalaf, T.,Marpe, H.&Banykhaled,H. (2011). The Effect of Financial Ratios, Firms Size and Cash Flow from Operating Activities on Earnings per Share: (An Applied Strategy: on Jordanian Industrial Sector). International Journal of Social Sciences and Humanity Studies,3(1). Lev, B. (1974).Association between Operation Leverage and Risk; Journal of Financial and Quality Analysis, 5(2). Loepold, A. B.& John.W. (1993).Financial Statement Analysis.6thedition.USA: McGraw Hill Companies. Manish, R. T.&Shaban, E.A. (2013). A Comparative study of Financial statement of ICICI and HDFC through Ratio Analysis. International Journal of Accounting and Financial Management Research, 8. 90

More, H. &Alkinsou, N. (1961).Financial Accounting for Managerial Accounting.7th edition.. London: Thompson Lewing. Okwo I. M. &Marire, I. M. (2012). Performance Measurement in Business Organizations; An Empirical Analysis of the Financial performance of some Breweries in Nigeria. Research Journal of Accounting and Finance, 3(11). Olowe, R. A. (1992). Financial Management Concepts and Capital Investment.Lagos:Berverly Jones Nig Ltd. Olowe, R.A. (1997). Financial Management; Concept, Analysis and Investment, Lagos: Bierely Jones Publisher. Omoregie, N.A.E (2014). Analyzing Companies Performance Using Financial Ratios.Journal of management and Corporate Governance, 6(1), 1-16. Omuya, J. O. (1992). Business Accounting, 3rd Edition. Lagos: Emanco Ltd. Pandey, I.M. (2005).Financial Management, Eight Edition, New Delhi: Vikas Publishing House pvt ltd. Peter,

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Tofeeq, J. (1997). Principle of Financial Alexandria: Modern University Office.

Management,

APPENDIX I DATA FROM BANKS’ ANNUAL REPORT

ACCESS BANK PLC Year: 2009 2010 2011 2012 2013 STERLING BANK PLC Year: 2009 2010 2011 2012 2013 ECO-BANK PLC Year: 2009 2010 2011 2012 2013 FIRST CITY M. BANK PLC

Shareholders’ equity N’000

Net profit after tax

Total assets

Total deposit

N’000

N’000

N’000

173,151,023 182,504,814 185,836,455 237,624,211 245,181,997

22,885,794 12,931,441 13,660,448 36,353,643 26,211,844

647,574,719 726,960,580 945,966,603 1,515,754,463 1,704,094,012

409,349,424 440,542,115 522,599,666 1,093,979,220 1,217,176,793

22,141,994 26,320,487 40,953,115 46,642,394 43,457,896

(9,188,328) 3,198,009 4,644,220 6,953,539 8,274,864

205,640,827 259,579,523 504,427,737 580,225,940 707,797,181

160,470,381 199,274,284 406,515,735 463,726,325 570,511,097

10,561,822 11,704,988 13,502,184 356,848,475 350,402,469

2,768,986 3,091,065 3,721,650 47,067,057 24,256,937

71,377,413 78,217,792 109,631,519 3,273,049,719 3,698,702,160

47,410,894 57,399,000 82,692,502 2,399,951,464 2,706,817,742

92

Year: 2009 2010 2011 2012 2013

ACCESS BANK PLC Year: 2009 2010 2011 2012 2013 STERLING BANK PLC Year: 2009 2010 2011 2012 2013 ECO-BANK PLC Year: 2009 2010 2011 2012 2013 FIRST CITY M. BANK PLC Year: 2009 2010 2011 2012 2013

ACCESS BANK PLC Year: 2009 2010 2011 2012 2013 STERLING BANK PLC Year: 2009 2010

127,457,689 134,635,822 117,373,161 130,890,713 131,321,521

3,465,812 7,322,322 (11,567,744) 12,559,592 6,027,752

514,409,614 530,073,488 593,273,465 890,313,606 131,482,189

322,418,759 334,897,851 410,578,646 644,268,545 715,214,192

Profit before tax

Income

Net worth

N’000

N’000

N’000

Loan and advances N’000

28,105,815 17,668,584 16,016,762 37,028,147 31,365,396

69,410,757 59,526,316 68,789,153 121,300,972 66,685,119

184,830,757 182,504,814 185,836,455 237,624,211 245,181,997

391,688,687 403,178,957 463,131,979 554,592,199 735,300,741

(7,258,326) 3,688,251 3,459,744 7,499,651 9,310,198

18,664,170 20,384,374 26,964,893 39,208,776 57,468,725

22,141,994 26,320,487 41,057,336 46,642,394 63,457,896

78,140,098 99,312,070 159,734,616 229,420,874 321,743,748

3,737,486 4,664,030 5,426,294 55,487,460 36,404,858

8,221,041 9,263,479 12,059,871 283,979,335 328,867,302

10,561,822 11,704,988 13,502,184 356,848,475 350,402,469

23,454,555 25,505,290 43,699,373 1,549,731122 1,874,856,461

3,979,274 7,564,888 (13,935,966) 12,417,616 6,088,029

52,049,940 35,163,951 47,681,884 37,398,853 6,027,752

127,457,689 134,635,822 117,373,161 46,642,394 63,457,896

270,188,782 323,531,060 315,101,376 350,489,990 450,532,965

Current asset N’000

Current liability N’000

666,229,813 643,606,953 804,830,018 1,332,475,026 1,499,150,788

468,687,455 521,769,988 730,986,234 1,278,130,252 1,458,912,015

193,496,424 249,810,513

169,297,283 208,200,935

93

2011 2012 2013 ECO-BANK PLC Year: 2009 2010 2011 2012 2013 FIRST CITY M. BANK PLC Year: 2009 2010 2011 2012 2013

485,939,871 512,818,246 616,153,696

436,061,880 498,663,895 600,981,160

54,989,679 51,587,691 77,230,524 2,900,652,956 3,234,077,062

56,573,698 62,603,582 90,826,802 2,712,707,279 3,134,345,596

491,149,143 495,719,621 559,838,266 803,163,521 918,182,985

375,767,993 370,321,477 455,324,811 732,345,082 804,070,894

Profitability Ratios Banks

Years

ROA(NPAT/TA)

ROE(NPAT/SE)

OPM(PBT/INCOME)

ACCESS BANK PLC

2009

0.0353

0.1322

0.4049

2010 2011 2012 2013 2009 2010

0.0178 0.0144 0.0240 0.0154 (0.0324) 0.0161

0.0709 0.0735 0.1530 0.1069 (0.3008) 0.1588

0.2968 0.2328 0.3053 0.4704 (0.3889) 0.1809

2011 2012 2013 2009 2010

0.0137 0.0120 0.0117 0.0388 0.0395

0.1687 0.1491 0.1904 0.2622 0.2641

0.1283 0.1913 0.1620 0.4546 0.5035

2011 2012 2013 2009

0.0339 0.0144 0.0066 0.0067

0.2756 0.1319 0.0692 0.0272

0.4499 0.1954 0.1107 0.0765

2010 2011 2012 2013

0.0138 (0.0195) 0.0141 0.0458

0.0544 (0.0986) 0.0960 0.0459

0.2151 (0.2923) 0.3320 1.0100

STERLING BANK PLC

ECO-BANK PLC

FCMB

Liquidity Ratios 94

Banks

Years

CURRENT RATIO(CA/CL)

ACCESS BANK PLC

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

1.4215 1.2335 1.1010 1.0425 1.0276 1.1429 1.1999 1.1144 1.0284 1.0252 0.9720 0.8240 0.8503 1.0693 1.0318 1.3071 1.3386 1.2295 1.0967 1.1419

STERLING BANK PLC

ECO-BANK PLC

FCMB

Net worth to total assets(NW/TA) 0.2854 0.2511 0.1965 0.1568 0.1439 0.1077 0.1014 0.0814 0.0804 0.0897 0.1480 0.1496 0.1232 0.1090 0.0947 0.2478 0.2540 0.1978 0.0524 0.4826

Leverage Ratios Banks

Years

ACCESS BANK PLC

STERLING BANK PLC

ECO-BANK PLC

FCMB

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009

Loan to total deposit(L/TD) 0.9569 0.9152 0.8862 0.5069 0.6041 0.4869 0.4984 0.3929 0.4947 0.5640 0.4947 0.4444 0.5285 0.6457 0.6926 0.8380

0.4230 0.4143 0.3556 0.2172 0.2014 0.1380 0.1321 0.1007 0.1006 0.0762 0.2228 0.2039 0.1633 0.1487 0.1295 0.3953

2010 2011 2012 2013

0.9661 0.7675 0.5440 0.6299

0.4020 0.2859 0.2032 0.1836

95

CAR(SE/TD)

Profitability Ratios Banks

Years

ACCESS BANK PLC

20092013 20092013 20092013 20092013

STERLING BANK PLC ECO-BANK PLC FCMB

5 year Average ROA 2.14%

5 year Average ROE 1.07%

5 year Average OPM 34.20%

1.72%

19.36%

21.03%

2.66

20.06%

34.28%

1.20

6.44%

18.52%

Liquidity Ratios Banks ACCESS BANK PLC STERLING BANK PLC ECO-BANK PLC FCMB

Years

5 year Average CR

5 year Average NW/TA

2009-2013 2009-2013 2009-2013 2009-2013

1.17 1.10 0.95 1.22

0.21 0.09 0.12 0.23

96

Leverage Ratios Banks ACCESS BANK PLC STERLING BANK PLC ECO-BANK PLC FCMB

Years

5 year Average L/TD

5 year Average CAR

2009-2013 2009-2013 2009-2013 2009-2013

1.77 1.49 0.56 1.75

0.32 0.11 0.17 0.29

APPENDIX II T-TEST TABLE

97

98