A ratio is a simple expression of one number in terms of another. In order for ratios to be meaningful, there should be an explicit and clear relationship between the two numbers used in the calculation of each ratio. The data used in the calculation needs to be examined in order to be able to comprehend the full meaning of the relationship. Furthermore, a ratio needs to be compared to some other ratio or a standard measure, in order to arrive at a better and more comprehensive understanding of it.
Financial ratios measures are divided into:
· Measures related to the stability and liquidity of the business enterprise.
· Measures related to the profitability and operating performance of the business enterprise.
Several widely used ratios are presented in this appendix. These ratios are useful analytical tools in appraising the performance of the enterprise and in judging its management.
We can add to the reliability of the financial ratios by giving appropriate consideration to the position of the enterprise in the industry or trade of which it is part. This can be done by comparing the financial ratios with standardized measures, such as that used in this guide.
The financial measures presented in this appendix are considered quite helpful tools in assessing the financial condition of the business enterprise and the results of its operations. However, they should never replace sound judgement, but should be considered as one of the many factors contributing to the decision-making process, such as change in management, change in the enterprise’s markets, products, or services, the economic trends of the industry or trade, and the financial conditions of the economy.
¨ CALCULATION METHOD
The financial ratios have been simply calculated using year-end figures derived from the annual reports of the companies.
¨ EARNING PER SHARE (EPS)
This indicator measures the profitability strength of one share and is used by investors to evaluate the company’s previous performance and in forecasting future profits and investment opportunities.
EPS = (Net Income excluding minority interest & extraordinary income) / Weighted average number of Shares
¨ DIVIDEND PER SHARE (DPS)
Total cash dividend divided by the number of shares of common stock outstanding.
DPS = Cash Dividend / Number of Outstanding Shares
¨ PRICE TO BOOK VALUE
A ratio used to compare a stock's market value to its book value and indicates a company’s growth prospects.
P/BV = Closing Price/Book Value per Share
¨ PRICE EARNING RATIO
This multiple is an indication of how much the market is willing to pay per unit of company earnings. The higher the P/E, the higher the premium the market places on the earnings of the company, indicating a confidence in future earnings growth. Expectations of high-growth are less easily realized than predictions of low-growth. Therefore, high P/E stocks are usually riskier than those with low P/E ratios.
P/E = Closing Price Per Share/Earnings Per Share
¨ DIVIDEND YIELD
A financial ratio, which shows how much a company pays out in dividends each year relative to its share price.
Dividend Yield (%) = (Dividend per share/Closing price per share) * 100
¨ DIVIDEND PAYOUT RATIO
A financial ratio, which shows how much a company, pays out in dividends each year relative to its net profit.
Dividend Payout Ratio (%) = (Annual Cash Dividend/ Net Income excluding minority interest & extraordinary income) * 100
¨ RETURN ON EQUITY
A ratio that measures a corporation's profitability. It reveals how much profit a company generates with the money shareholders have invested in it.
ROE = ((Net Income excluding minority interest & extraordinary income) / Shareholders’ Equity)*100
¨ RETURN ON ASSETS
A useful indicator of how profitable a company is relative to its total assets. It also gives an idea as to how well the company is able to use its assets to generate earnings.
ROA = ((Net Income excluding minority interest & extraordinary income) / Total Assets)*100
¨ TOTAL SHAREHOLDER’S EQUITY / TOTAL ASSETS (EQUITY RATIO)
The equity ratio measures the proportion of the total assets financed by shareholders, as distinguished from creditors, and measures the efficiency of capital used. It is computed by dividing total stockholders’ equity by total assets.
¨ TOTAL LIABILITIES / SHAREHOLDERS’ EQUITY
This ratio measures a company's financial leverage and is calculated by dividing total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets. It is computed by dividing total liabilities by stockholders’ equity.
¨ TOTAL LOANS/TOTAL DEPOSITS
This ratio calculates the percentage of loans financed by deposits. It is a measure of liquidity and indicates the bank’s ability to provide additional loans. It is calculated by dividing the total loans and advances by the total deposits.
¨ TOTAL LOANS/TOTAL ASSETS
A ratio used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by dividing the total loans and advances by the total assets.
¨ LIQUID ASSETS/TOTAL ASSETS
This ratio measures the current assets, which can be converted into cash in a very short period, over total assets. It is calculated by dividing the liquid assets by the total assets.
¨ CURRENT RATIO
This liquidity ratio measures a company's ability to pay short-term obligations and also helps to give an idea as to the efficiency of the company's operating cycle. It is calculated as follows:
Current ratio = Current assets/Current liability
¨ QUICK RATIO
This ratio is an indicator of a company's short-term liquidity. It measures a company's ability to meet its short-term obligations with its most liquid assets. It is calculated as follows:
Quick ratio = (Cash + Trading securities +Accounts receivable)/Current liabilities
¨ CAPITAL ADEQUACY RATIO
A ratio that indicates the combined level of Market Risk and Credit Risk, which a bank is exposed to. The minimum acceptable Capital Adequacy Ratio is 8%, as set by the Basel Accord. However, the Central Bank of Bahrain has set a higher limit of 12% for banks operating in Bahrain.
Capital Adequacy Ratio = [Total Capital Base/Total Risk-Weighted Assets] * 100%
where:
|
Total Capital Base |
== |
Tier (1) Capital + Tier (2) Capital Shareholders’ Equity + General Provision subject to 12% risk adjusted exposure limitation
|
|
Total Risk-Weighted Assets |
= |
Credit Risk-Weighted Assets + Market Risk-Weighted Assets |
¨ DEPOSITS WITH BANKS
It represents balances with foreign banks.
¨ CUSTOMER DEPOSITS
It represents customer deposits with banks, which may be time deposits, call deposit or current accounts.
¨ TRADE ACCOUNTS RECEIVABLE
It represents the receivables relating to the trade of the business. Any other receivables have been added into the current assets account.
¨ CURRENT ASSETS (LIQUID ASSETS)
Current Assets refer to cash or any other assets that are capable of being converted into cash within a relatively short period of time. The period is usually one year.
¨ FIXED ASSETS
It represents net fixed assets i.e. fixed assets less accumulated depreciation. These are tangible assets, such as property, plant and equipment.
¨ TOTAL ASSETS
The properties or economic resources owned by a business such as cash, accounts receivable, merchandise, inventory, equipment, buildings and land.
¨ CURRENT LIABILITIES
Current liabilities are obligations due within a short period of time, usually one year.
¨ NONCURRENT LIABILITIES
An organization’s debts that fall due beyond one year.
¨ OTHER LIABILITIES
Are any other liabilities of an organization that have not been stated separately in the liabilities section under the set format for each sector. Other liabilities may include accrued interest payables, medium and long-term loans, certificates of deposits and so on.
¨ PAID-UP CAPITAL
It represents the value of shares that have been issued and fully subscribed.
¨ TREASURY SHARES
When a company repurchases its common stock and holds this stock in the company’s treasury. These shares don’t pay dividends, have no voting rights, and are not included in the number of shares outstanding.
¨ SHAREHOLDERS EQUITY
It represents net assets of the company after deduction of liabilities. It includes paid-up capital, in addition to all various reserves and retained earnings, less treasury stock and minority interest.
¨ MURABAHA
A contract in which a financial institution purchases goods upon the request of a client, who makes deferred payments which cover costs and an agreed-upon profit margin for the institution. The financial institution handles payment to a supplier and the incidental expenses of delivery, against a deferred payment made by the buyer to cover delivery costs and a share of the buyer’s mark up.
¨ UNRESTRICTED INVESTMENT ACCOUNTS
Refer to the funds received by the Islamic Bank from individuals and others, on the basis that the bank will have the right to use and invest those funds without restriction, including the Islamic Banks’ right to commingle those invested funds with its own investment exchange for proportional participation in its profit and losses, after the Islamic Bank receives its profit as a Mudharib. Unrestricted Investment Accounts have been added to the deposits account.
¨ TURNOVER
A synonym for revenue (sales). Sales are earned revenue from the company’s core business.
¨ OPERATING COSTS
Operating costs refer to the day-to-day expenses incurred in running a business, such as sales and administration expenses.
¨ OTHER EXPENSES
Represents all expenses incurred, other than operating expenses and interest payments.
¨ GROSS PROFIT
The revenue from sales less cost of merchandise sold.
¨ NET PROFIT (NET PROFIT AFTER TAX)
It represents the net income for the financial year of the company, computed by deducting total expenses incurred including any tax incurred by the company provision (for companies with subsidiaries abroad) and minority interest, from the total revenues generated.
¨ PREMIUM
In general, extra payment is usually made as an incentive. An insurance premium is the fee paid to an insurance company for insurance protection. Also, single or multiple payments are made to build-up an annuity fund.
¨ GROSS PREMIUM
Is the raw premium before subtracting costs for reinsurance.
¨ NET PREMIUM
Is the original gross premium, less return premium and premiums for reinsurance.
¨ INSURANCE RESERVES
The insurance reserve is the provision held to meet underwriting liabilities. The term covers unearned premium reserve, unexpected risk reserve, (both notified and incurred but not reported), outstanding claims, claims expenses reserve, funds and equalization reserve.
Is the portion of the earnings of an insurance company that comes from the function of underwriting. It excludes the earnings from investments, either in the form of income from securities or sale of securities at a profit. The remainder is found by deducting incurred losses and expenses from earned premiums.
¨ THE UNDERWRITING COSTS
Are the total costs associated with the underwriting operation.
Represents all other income generated, except operating and interest income.
¨ PAR VALUE
It is the nominal price of the initial issuance of the shares, which was assigned by the issuer.
¨ BOOK VALUE PER SHARE
The book value of shareholders’ equity reflects the sum of capital contributions and accumulated earnings in excess of dividends divided by the total number of common shares outstanding.
Book Value Per Share = Shareholders’ Equity/Number of Common Shares Outstanding
¨ CLOSING PRICE
Is the closing price of a
listed company’s shares at the end of trading during a given period (year).
¨ HIGH AND LOW PRICES
The high price and low price of a company’s shares are the highest and lowest price a particular stock reached during a given period. The fluctuation of stock can be analysed by reviewing the high and low prices.
¨ NUMBER OF OUTSTANDING SHARES
Shares of a corporation authorized in the corporate charter, which have been issued, paid-up and are outstanding. These shares, which are net of treasury, represent capital invested by the company’s shareholders and owners.
Outstanding shares = Issued & fully paid up shares – Treasury shares
¨ THE VOLUME OF SHARES TRADED
The total number of a listed company’s shares that traded on the Exchange during a year (January-December).
¨ THE VALUE OF SHARES TRADED
The total monetary value of a listed company’s shares that traded on the Exchange during a year (January-December). It is calculated by taking the value of the transaction and multiplying it by the volume of shares traded.
¨ THE MARKET CAPITALISATION
The aggregate market value of a listed security is equal to the closing price of the shares, multiplied by the total number of issued and fully paid shares, which are inclusive of treasury shares.
¨ SHARES TURNOVER RATIO (VALUE)
A measure of a stock’s
trading activity, calculated by dividing the value of shares traded during a
given period by the market capitalization of the last day of the same period.
¨ NOTES
N/A: Not Available
NM: Not Meaningful
N/AP: Not Applicable
Exchange Rates against BD:
USD= 0.377
OR=0.97927
QR=0.10357
KD=2005= 1.2911
2006= 1.3000
2007= 1.3700
2008= 1.3700
2009= 1.2920
Main Source of Information
All the financial variables in the summarized financial statements have been derived from the audited annual reports of the respective listed company.