Profitability Ratios

Profitability RatiosProfitability ratios are a class of monetary measurements that are utilized to survey a business'

capacity to create profit when contrasted with its costs and other important expenses acquired

amid a particular time of time. For the vast majority of these ratios, having a higher quality in

respect to a contender's proportion or the same ratio from a past period is characteristic that the

organization is doing great.

Some of the profitability ratios are-

Return on Asset (ROA)

Return On Equity (ROE)

Net Interest Margin (NIM)

Net Non Interest Margin

Net Operating Margin

Earnings Per share (EPS)

Net profit margin

Retention Ratio

Return on Asset (ROA)

ROA measures the effectiveness with which the organization is dealing with its interest in

resources and utilizing them to create benefit. It gauges the measure of benefit earned with

respect to the firm’s level of investment in total assets. The higher the rate is better, on the

grounds that that implies the organization is making a decent showing utilizing its assets to

generate sales.

Formula Used: Return on Asset (ROA) =Net IncomeTotal Asset

Table for Return on Asset (ROA) of Brac Bank Ltd. From 2012-2014

Company Names Year 2012 Year 2013 Year 2014BRAC Bank Limited 0.31% 0.73% 1.0%

2012 2013 20140.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

0.31%

0.73%

1.02%

BRAC Bank Ltd.

Figure: Trend Analysis for ROA

The ROA is also showing constant result for Brac bank. In 2014 each TK. 100 value of assets

produced a return of Tk. 1.0 for Brac Bank Ltd. For 2012, 2013, it was Tk. 0.31, Tk. 0 .73,

separately for each Tk. 100 value of assets of Brac Bank Ltd. In the event that we take a gander

at the time series analysis diagram we can see that for 2013 and 2014 the proportionate

increment in Net Income was more than that of Total Assets thus the ROA was higher.

Return on Equity (ROE)

Return on equity measures a Bank's benefit by uncovering the amount of benefit a bank creates

with the cash shareholders have contributed. ROE is seen as a standout amongst the most

essential financial ratios. It gauges a firm's productivity at generating profits from each taka of

net assets, and shows how well an organization utilizes speculation taka to produce earnings

growth. This is the ratio potential investors look at when deciding whether or not to invest in the

company.

Formula Used: Return on Equity =Net Income

Total EquityCapital

Table for Return on Equity (ROE) of Brac Bank Ltd from 2012-2014


2012 2013 20140.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

5.32%

10.76%11.78%

BRAC Bank Ltd.

Figure: Trend Analysis for ROE

The ROE of Brac Bank demonstrates that the shareholders are accepting an expanding return all

through the three years. In 2014 each common shareholders have earned Tk. 5.32 for each Tk.

100 contributed. For 2012 and 2013 it was Tk. 10.76 and Tk. 11.78 separately for each Tk. 100

put resources into Brac Bank Ltd.

For these three years from 20012- 2014, ROE was most elevated in 2014 with an 11.78% and

least in 2012 with 10.76%. On the off chance that we take a gander at the time series analysis

graph we can see that it has been expanding after the year 2012. The explanation behind this

increment is that the proportionate increment altogether Equity Capital was not exactly the Net

Income for the bank after 2012. This is indicating great execution of the bank after 2012. It is a

vital proportion in demonstrating if the bank is gainful or not and great execution here is better

for the bank.

Net Interest Margin (NIM)

Net Interest Margin (NIM) is an estimation of the distinction between the interest incomes

created by banks or other financial institutions and the measure of premium paid out to their loan

specialists.

Formula Used: Net Interest Margin (NIM) =Interest Income−Interest Expense

Total Assets

Table for Net Interest Margin (NIM) of Brac Bank Ltd from 2012-2014


2012 2013 20143.60%

3.65%

3.70%

3.75%

3.80%

3.85%

3.90%

3.75%

3.88%

3.72%

BRAC Bank Ltd.

Figure: Trend Analysis for NIM

From the year 2012 to 2014 the Net Interest Margin of Brac Bank was in an expanding pattern.

Be that as it may in 2014 it develops by a low rate. In 2013 the degree expanded from 3.75% to

3.88% on account of the considerable development of their interest income. Their interest

expense additionally developed yet at a much slower rate, which thus expanded their net interest

income. This inevitably expanded their net interest Margin ratio.

In 2014 their NIM ratio falls considerably at higher rate. It inspects how fruitless of company's

investment choices were contrasted with its obligation circumstances.

NB: This ratio does not show proper results since Total Assets do not generate Interest Income. Only Interest Sensitive Assets (ISA) generates Interest Income. Miscellaneous Assets do not generate Interest Income.

Net Non Interest Margin

This measure the amount of non-interest incomes originating from deposit service charges and

service fees the financial firm has possessed the capacity to collect (fee income) in respect to the

measure of interest costs incurred (including salaries and wages, repairs and maintenance cost of

facilities and loan loss expenses). For a large portion of the banks the net non-interest income is

generally negative. This is predominantly in view of the way that non-interest costs for the most

part overwhelm the fee income.

Formula Used: Net Non-Interest Margin =Non Interest Income−Non Interest Expense

Total Assets

Table for Net Non-Interest Margin of Brac Bank Ltd from 2012-2014


2012 2013 2014

-0.90%

-0.80%

-0.70%

-0.60%

-0.50%

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

-0.79%

-0.43% -0.40%

BRAC Bank Ltd.

Figure: Trend Analysis for NNIM

In 2014 for every Tk. 100 worth of Total Assets the bank generated Tk. -0.40 Net Non-Interest

Income. For 2012 and 2013 it was Tk. -0.43 and Tk. -0.79 respectively for every Tk. 100 worth

of assets of Brac Bank Ltd.

From the graph we can see that trend is upward from 2012-2014 because of the increase in Net

Non-Interest Income. In 2012 the ratio was high, -0.79%, as the bank spend most of its asset in

non-interest item. It also means they generates more non- interest operating expenses.

Net Operating Margin

This ratio demonstrates how productively the assets of a firm are used to grow the spread/edge

between operating revenues and operating expenses. operating revenue is the whole of interest

income and non-interest income, and operating expense is the sum of interest expense and non-

interest expense.

Formula Used: Net Operating Margin ¿Totaloperating revenues−TotalOperating expense

Total Assets

Table for Net Operating Margin of Brac Bank Ltd from 2012-2014


2012 2013 20142.70%

2.80%

2.90%

3.00%

3.10%

3.20%

3.30%

3.40%

3.50%

2.96%

3.45%

3.31%

BRAC Bank Ltd.

Figure: Trend Analysis for Net Operating Margin

From the year 2012 to 2013, we can observe a big fluctuation in net operating margin for Brac

Bank. In 2013 it increases, but it falls again in 2014. During 2013 to 2014 it falls from 3.45% to

3.31%. It also means that in 2013 bank generates TK. 3.45 Net Operating Income for every Tk.

100 worth of Total Assets. This Net Operating Income is the difference of Operating Revenue

and Operating Expense of a financial institution. The highest was in 2013 with a 3.45% and the

lowest being in 2012 with a 2.96%. Possible reason for fluctuation is that proportionate change

in Net Operating Income was less than that of change in Total Assets.

Net Profit Margin

Net profit margin is a standout amongst the most nearly taken after numbers in finance.

Shareholders take a gander at net revenue nearly on the grounds that it demonstrates how great

an organization is at changing over revenue into profits accessible for shareholders.

Formula Used: Net Profit Margin ¿Net income

TotalOperatingRevenues

Table for Net Profit Margin of Brac Bank Ltd from 2012-2014


2012 2013 20140.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2.56%

5.30%

9.17%

BRAC Bank Ltd.

Figure: Trend Analysis for Net Profit Margin

The NPM ratio of Brac Bank is demonstrating an expanding pattern. It increases massively from

2.56% to 5.30% amid 2012 to 2013 and from 5.30% to 9.17% amid 2013-2014. It is on the

grounds that its net income was expanding at a higher rate contrast with aggregate total operating

revenue. The higher profit margin also indicating their pricing strategy and the impact

competition has on margins. It also indicates that bank is more profitable and has better control

over its costs compared to its competitors.

NB: NPM also equals to the product of Expense Control Efficiency ratio and Tax

Management Efficiency ratio. Since, ECE and TME ratios deals with how efficiently bank

is managing operating expense and tax expense respectively, the product of this two equals

NPM ratio. Even mathematically the product of the formulas of ECE and TME equals to

the NPM ratio’s formula

Earnings Per share (EPS)

The segment of an organization's profit allotted to every outstanding share of common stock.

Earnings per share serve as a pointer of an organization's profitability. It tells a financial

specialist how a significant part of the organization's benefit has a place with every share of

stock.

Formula Used: Earnings Per share (EPS) ¿Net Income

Commonequity shares outstanding

Table for Earnings Per share (EPS) of Brac Bank Ltd from 2012-2014

Company Names Year 2012 Year 2013 Year 2014BRAC Bank Limited TK. 1.14 TK. 2.81 TK. 3.19

2012 2013 20140

0.5

1

1.5

2

2.5

3

3.5

1.14

2.813.19

BRAC Bank Ltd.

Figure: Trend Analysis for Earnings Per share (EPS)

In 2014, for Brac Bank Ltd. common shareholders had earnings of Tk. 1.94/offer. For 2013 and

2014 the earnings per share were Tk. 2.81 and Tk. 3.19 separately for each Tk. 100 value of Net

Income. This means the company is more profitable and the company has more profits to

distribute to its shareholders. The EPS for Brac Bank Ltd. took a sharp upward turn from 2011

because Brac Bank Ltd. didn’t undertook new project so they didn’t issued new number of shares

in the share market. So, proportionate in number of common shares outstanding didn’t increased

by a great deal compared to proportionate increase in NI after tax.

Retention Ratio

The proportion that shows future development capability of a financial organization is called retention

ratio. Higher is the retention ratio better is the future reinvestment limit of a bank or any financial

institution.

Formula Used: Retention Ratio =1−Dividend Payout Rat io

Brac Bank Ltd. didn’t issue any in the last three years. As they didn’t offer any dividend, we

could not calculate retention ration.

Price Earnings Ratio (P/E)

This proportion measures the sum that financial specialists are willing to pay for every dollar of

company's income. The level of price/earnings ratio demonstrates the level of certainty that

speculators have in the company's future performance.

Formula Used: Price Earnings Ratio (P/E) =Market Price Per ShareEarningsPer Share

Table for Price Earnings Ratio (P/E) of Brac Bank Ltd from 2012-2014

Company Names Year 2012 Year 2013 Year 2014BRAC Bank Limited TK. 1.14 TK. 2.81 TK. 3.19

2012 2013 2014 -

5.00

10.00

15.00

20.00

25.00

30.00

35.00

30.04

10.98 9.02

BRAC Bank Ltd.

Figure: Trend Analysis for Price Earnings Ratio (P/E)

In 2014 the shareholders of Brac Bank Ltd were willing to pay Tk. 9.02 for every Tk. 1 of

reported earnings. For 2012 and 2013 shareholders were willing to pay Tk. 30.04 and Tk. 10.98

respectively. From the above graph we can see that P/E ratio of Brac Bank Ltd is decreasing

which is not good for the company. It may lead company negative future performance and

investors may not be willing to pay more for this company's shares. It is also an indication of

poor current performance. This could prove to be a poor investment.

Since this ratio is based on the earnings per share calculation, management can easily manipulate

it with specific accounting techniques.

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Profitability Ratios