Assignment on Balance Sheet Analysis

Course Title: Strategic Management & Information Systems Course ID: EMIS-524

Submitted by:
Mohammad Hasibur Rahman
ID No: 60613 06 051

A balance sheet is a snapshot of a business financial condition at a specific moment in time, usually at the close of an accounting period. Balance Sheet is a financial statement that summarizes a companys assets, liabilities and shareholders equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet shows: Assets = Liabilities + Shareholders Equity A balance sheet thus, provides detailed information about a companys assets, liabilities and shareholders equity. The balance sheet is one of the most important pieces of financial information issued by a company. It is a snapshot of what a company owns and owes at the point in time. That's why we are going to analyze the balance sheet of Jamuna Bank Limited to determine its potentiality.

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Geometric representation of the six basic sections of the balance sheet and their respective percentage of total assets or liabilities + shareholder's equity of Jamuna Bank Limited in 2009.

Liquid Current Assets (12.06%) Not so Liquid Current Assets (83.7%) Long Term Assets (4.24%)

Current Liabilities (16.94%) Long Term Debt (74.90%) Capital Contributed plus Retained Earnings (8.16%)

Assets

Liabilities + Shareholders' Equity

Geometric representation of the six basic sections of the balance sheet and their respective percentage of total assets or liabilities + shareholder's equity of Jamuna Bank Limited in 2010.

Liquid Current Assets (7.93%) Not so Liquid Current Assets (85.32%) Long Term Assets (6.75%)

Current Liabilities (17.25%) Long Term Debt (73.73%) Capital Contributed plus Retained Earnings (9.02%)

Assets

Liabilities + Shareholders' Equity

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Now we are going to analyze the strength of Jamuna Bank Limited by using some ratio analysis: Current Ratio: Current ratio is calculated in order to work out firms ability to pay off its short-term liabilities. This ratio is also called working capital ratio. This ratio explains the relationship between current assets and current liabilities of a business. Where current assets are those assets which are either in the form of cash or easily convertible into cash within a year. Similarly, liabilities, which are to be paid within an accounting year, are called current liabilities. Current Ratio = Current Assets / Current liabilities Current Ratio (2009)= = = Current Ratio (2010) = = = (3211254058 + 2174083914 + 500000000) / (123031261 + 4715306887 + 516315720 + 2891250933) 5885337972 / 8245904801 0.7137 (4487942759 + 1151998395) / (502322818 + 7013774707 + 776970643 + 3967879272) 5639941154 / 12260947440 0.4599

Current ratio shows the short-term financial position of the business. This ratio measures the ability of the business to pay its current liabilities. The ideal current ratio is supposed to be 2:1 i.e. current assets must be twice the current liabilities. In case, this ratio is less than 2:1, the short-term financial position is not supposed to be very sound and in case, it is more than 2:1, it indicates idleness of working capital. From the analysis it is initiated that the Current Ratio of Jamuna Bank Ltd is not agreeable. Moreover the ratio has more declined in 2010 which is an alarming sign for Jamuna Bank Ltd. Liquidity Ratio: Liquidity ratio shows short-term solvency of a business in a true manner. It is also called acid-test ratio and quick ratio. It is calculated in order to know how quickly current liabilities can be paid with the help of quick assets. Quick assets mean those assets, which are quickly convertible into cash. Liquidity (acid test) ratio/quick ratio = quick assets / current liabilities Liquidity Ratio (2009) = = = = = = 3211254058 / (123031261 + 4715306887) 3211254058 / 4838338148 0.6637 4487942759 / (502322818 + 7013774707) 4487942759 / 7516097525 0.5971 Page 4

Liquidity Ratio (2010)

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Liquid ratio is calculated to work out the liquidity of a business. This ratio measures the ability of the business to pay its current liabilities in a real way. The ideal liquid ratio is supposed to be 1:1 i.e. liquid assets must be equal to the current liabilities. In case, this ratio is less than 1:1, it shows a very weak short-term financial position and in case, it is more than 1:1, it shows a better short-term financial position. From the above calculation it is found that the liquidity ratio is not well enough & it has worsened from 2009 to 2010. So the authority has to be concerned about this factor. Long Term Debt Equity Ratio: Debt equity ratio shows the relationship between long-term debts and shareholders funds. It is also known as External-Internal equity ratio. Long Term Debt Equity Ratio = Total Liabilities / Shareholder's Equity Long Term Debt Equity Ratio (2009) = 44750076511 / 3980875046 = 11.2412 = 64655581533 / 6408191252 = 10.0895

Long Term Debt Equity Ratio (2010)

This ratio is a measure of owners stock in the business. Proprietors are always keen to have more funds from borrowings because: (a) Their stake in the business is reduced and subsequently their risk too. (b) Interest on loans or borrowings is a deductible expenditure while computing taxable profits. Dividend on shares is not so allowed by Income Tax Authorities. The normally acceptable debt-equity ratio is 2:1. From the computation we found that the long term debt equity ratio is pleasurable. Leverage: Leverage is a ratio that measures a company's capital structure. In other words, it measures how a company finances their assets. It refers to the use of fixed costs in an attempt to increase the profitability. Leverage affects the level and variability of the firm's after tax earnings and hence, the firm's overall risk and return. Leverage = Long Term Debt / Total Equity Leverage (2009) = (25201516054 + 2762490181 + 6118323405 + 151000384 + 2270841688) / 3980875046 = 36504171712 / 3980875046 = 9.1698

Leverage (2010)

= (36694548333 + 4236362326 + 7900331661 + 83697730 + 3479694042) / 6408191252 = 52394634092 / 6408191252 = 8.1761 Prepared by: 60613 06 051

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Operating risk refers to the risk of the firm not being able to cover its fixed operating costs. Since operating leverage depends on fixed operating costs, larger fixed operating costs indicates higher degree of operating leverage and thus, higher operating risk of the firm. High operating leverage is good when sales are rising but bad when they are falling. Financial risk refers to the risk of the firm not being able to cover its fixed financial costs. Since financial leverage depends on fixed financial cost, high fixed financial costs indicates higher degree of operating leverage and thus, high financial risk. High financial leverage is good when operating profit is rising and bad when it is falling. Relationship between operating leverage and financial leverage is multiplicative rather than additive. Operating leverage and financial leverage can be combined in a number of different ways to obtain a desirable degree of total leverage and level of total firm risk. Leverage is an effort or attempt by which a firm tries to show high result or more benefit by using fixed costs assets and fixed return sources of capital. It insures maximum utilization of capital and fixed assets in order to increase the profitability of a firm, it helps to know the reasons not having more profit by a company. From the above discussion and calculation it can be said that Though the bank was established by a group of winning local entrepreneurs conceiving an idea of creating a model banking institution with different outlook to offer the valued customers, a comprehensive range of financial services and innovative products for sustainable mutual growth and prosperity, it will have to be concerned to improve in some criteria otherwise it may be listed as a problem bank.

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