Financial Statement

CHAPTER ONE INTRODUCTION 1. 1BACKGROUND OF THE STUDY For the past fifteen years Ecobank Ghana Limited has been consistently been at the forefront of Ghana Banking Industry. It has won more domestic recognition than more of its much older competitors; grown into what was hitherto Ghana’s largest merchant bank; and gone on to become one of the first bank in the country to become universal bank, offering commercial as well as merchant banking products and services. Ecobank Ghana Limited has nearly monopolized the most converted bank of the year award conferred annually at the Ghana Banking Awards. The bank has won this prestigious award for five times in the years 2001, 2002, 2003, 2005 and 2006. These achievements of Ecobank Ghana Limited were made possible by analysis of its financial performance. The impact of financial analysis on the performance of the banking industry has been discussed and debated upon by many scholars in the field of finance. Researchers have adopted measures like analyzing the relationship between organizations investment in human resources development and their performance in analysis financial performance.

Financial statement analysis can be a yardstick to measure an organization’s level of productivity and the level of contribution it should supposedly make to the development of an economy, all other things been equal. Critical assessment and analysis of financial performance should be the concern of any individual or group of people running financial institutions. Wild, Bernstern and Subramanyam (2001), defines financial statement analysis as the application of analytical tools and techniques to general-purpose financial statements and related data to derive estimates and inferences useful in business analysis. Thus financial statement analysis involves the use of simple and mathematical techniques, an understanding of accounting and appreciation of business strategy to gain insight into the reporting company’s history, current position and future prospects through examination of the company’s financial statement. The main function of the financial statement of a company is to provide information that will enable shareholders and loans creditors to evaluate the performance and financial position of a company. However, the absolute amount of profit or assets and liabilities, show in the financial statements is not usually a particularly meaningful criterion for evaluating the performance or financial position of any business. The primary financial statements of a company mostly analysis by users are;

• Profit and Loss Account

• Balance Sheet

• Cash Flow Statement Financial statement analysis consists of three broad areas, namely; profitability analysis, risk analysis and analysis of sources and uses of fund.

Financial ratios are the fundamental analytical tools for interpreting financial statements. With the aid of ratios one can determine the ability of a company to meet it current obligation and the profitability of the company. A good working knowledge of financial statements analysis is desirable simply because such statements and ratios derived from those statements are the primary means of communicating financial information. History of Ecobank Ecobank Ghana (EBG) was incorporated on January 9, 1989 as a private limited liability company under the Companies Code to engage in the business of banking. EBG was initially licensed to operate as a merchant bank by the Bank of Ghana on November 10, 1989. It commenced business on February 19, 1990. EBG has grown consistently over the years to become one of the leading banks in Ghana and a well-recognized brand in the Ghanaian banking industry. EBG acquired a universal banking license in 2003 and has since expanded its geographical reach and broadened its scope of financial services. EBG is a subsidiary of Ecobank Transnational Incorporated, a bank holding company which currently has twelve (12) subsidiaries across West and Central Africa. EBG itself currently has three wholly-owned subsidiaries, which offer a variety of non-banking financial services to complement EBG’s broad range o banking services. The subsidiaries are Ecobank Investment Managers Limited, Ecobank Stockbrokers Limited and Ecobank Leasing Company Limited The Company’s Mission and Vision EBG’s mission is to become a strategic part of a world-class African banking group.

The bank’s vision is to provide its customers convenient, accessible and reliable banking products and services. In line with this EBG seeks to create a unique Ghanaian institution through a determined focus on its customers, employees and shareholders and an absolute commitment to the achievement of excellence in the delivery of financial services. The bank therefore seeks to apply the following principles to its business decisions and conduct: Treat each customer as a preferred customer; Invest in training and development of its staff; Deliver products and services which respond to and exceed customer expectations; Develop markets and products to maintain the bank’s competitive advantage; Deliver superior returns to its shareholders; Maintain high standards of ethics and regulatory compliance at all time; Authorized Business Ecobank is authorized to: To carry on the business of banking in accordance with the provisions of the Banking Act 2004 (Act673) (the Banking Act) or any statutory modification or re-enactment thereof for the time being in force, including the following namely, borrowing, raising or taking up money lending or advancing money, discounting, buying, selling and dealing in foreign, currencies, bill of exchange, promissory notes, coupons, drafts, bills of lading, warrants, debentures, certificates, scrip and other financial instruments and securities, whether transferable or negotiable, or not; granting and issuing letters of credit, guarantees, indemnities and circular notes; buying, selling and dealing in bullion and specie; acquiring, holding, issuing on commission, underwriting and dealing with stocks, funds, shares, debentures, debenture stock, bonds, options, obligations, securities and investments of all kinds; the arrangement and syndication of loans and advances; receiving money and valuables on deposits, or for safe custody, or otherwise; collecting and transmitting money and securities, financing trade, managing property, and transacting all kinds of agency business commonly transacted by bankers. To undertake export development and financing, intermediation of international transactions, trade development and promotion, particularly within the ECOWAS and African Region, and provision of advisory and financial services for small and medium scale industries including mining, agricultural production and development and other priority areas in the economy. To undertake and execute any trusts, the undertaking whereof may seem desirable, and also undertake the office of executor, administrator, receiver, treasurer, registrar, and to keep for any company, government authority, or body, any register relating to any stocks, funds, shares or securities, or to undertake any duties in relation to the registration of transfers and the issue of certificates. To assist in the establishment, promotion, privatization, recapitalization or liquidation of associations, companies, syndicates and undertakings of all kinds, and to secure by underwriting or otherwise the subscription of any part of the capital of any such association, company, syndicate or undertaking, and to pay and receive any commission, brokerage or other remuneration in connection therewith; and undertake general corporate financial services. Engaging in development financing or acquiring or taking by subscription or by purchase or otherwise and the holding of, shares or stock of, and investing in the securities of any company engaged in development financing or any undertaking in Ghana or elsewhere having similar objects as may be deemed by the company to be likely to advance, either directly or indirectly. (www. ecobank. com) 1. 2STATEMENT OF THE PROBLEM Most people consider the banking institutions as financial sound and profit oriented without checking the nitty-gritty of their operations. This is because Banks being service providers and for that matter their product being intangible; the stakeholders cannot promptly deduce the financial performance by simple observing the product or from the physical structure of the banks. Though the Banking Industry is one of the most viable industry in Ghana, its performance has been vital and essential to investors, customers, employees and the government.

This is why the analysis of financial statement has become important in the banking industry so as to reveal financial strength and weakness in the banking industry. It therefore, becoming necessary to analyze the financial performance and for that matter the contribution of bank such as Ecobank Ghana Limited to date, in order to make the rightful judgments of what is happening in the banking industry. 1. 3RESEARCH QUESTION It is proposed in this study to research into financial statements of Ecobank Ghana Limited from 2004 to 2007 considering the following questions:

• What has been the overall effectiveness of Ecobank?

• What is the level of profitability of Ecobank Ghana Limited?

• What is the level of liquidity of Ecobank Ghana Limited?

• Do financial ratios have any effect on decision making? 1. 4OBJECTIVES OF THE STUDY The general objective of the study is to examine the effect and relevance of financial statement analysis on the performance of the banking industry in Ghana. Other objectives of the study are: o To assess how profitable Ecoobank has been in its operations. o To assess the ability of Ecobank to meet its obligations as and when they fall due. o To examine the benefits and limitation of ratio analysis as a tool in interpreting account. o To examine the performance of management of Ecobank Ghana Limited. 1. 5SIGNIFICANCE OF THE STUDY It is hoped that the result of this research will help the management of Ecobank Ghana Limited and other Commercial Banks to take new measure in improving their financial performance. Thus it will serve as a source of information to Ecobank Ghana Limited and other Commercial Banks in Ghana to evaluate their financial performance vis-a-vis the contribution they make to the development of Ghana. Other researchers who may be studying issues that pertain to financial statement analysis would also find this study helpful. It could serve as a source of inspiration and information for their study. It is also hoped that the outcome of this study will be helpful to practitioners and students in Accounting and Finance to upgrade their knowledge on financial statement analysis. 1. 6SCOPE OF THE STUDY The study covered analysis of the financial statements of Ecobank for the past four years (2004 – 2007) using ratios. Data and information used for this study was the financial statements of Ecobank Ghana Limited for the specified period. In addition the managing director of Ecobank was interviewed to find out the uses and limitations of financial statement analysis in decision making. 1. 7ORGANIZAION OF THE STUDY The study was divided into five chapters. Chapter one was about the introduction. It gives the background of the study, statement of the problem, research question, and objectives of the study, scope of the study and how the study has been organized.

Chapter Two reviewed various works related to this topic. The review analyzed, criticized and commanded certain studies that have been done prior to this study. Chapter Three focused on the methodology adopted for this study. It was about the data collection method, population and sample and the types of ratios used in the analysis. In Chapter Four, detail analysis of the financial statement of Ecobank Ghana Limited was done using financial ratios and trend analysis. Findings or results form the analysis were discussed using appropriate graphs.

Chapter Five is the concluding chapter and here lessons from the study were drawn. Conclusion was based on the finding of the objectives and recommendation was made. CHAPTER TWO LITERATURE REVIEW 2. 1 FINANCIAL STATEMENTS According to Chesnick (2000), a brief review of cooperative financial statements is warranted before starting a discussion of financial analysis. Financial statements provide certain basic information that focuses on the entity as a whole and meets the common needs of external users. Three main financial statements are required from businesses; a statement of financial position (balance sheet), a statement of activities (operating statement), and a statement of cash flows. The balance sheet states the cooperative’s assets, liabilities, and member’s equity as of a particular date. The stated liabilities indicate the amount owed and are stated at cost.

Member’s equity is the difference between assets and liabilities. The Statement of Cash Flows indicates cash receipts and cash disbursements during the accounting year.

The Statement of Cash Flows summarizes the operating, investing, and financing activities of a business enterprise during an accounting period and completes the disclosure of changes in financial position that are not readily apparent in comparative balance sheets and income statements. One additional financial statement that is frequently available in the annual reports issued by cooperatives. The statement of Changes in Members Equity describes how various equity accounts are affected during the business cycle. 2. 1. 1 Balance Sheet. According to Meyer (2006), the balance sheet relates to an entity’s financial position at a point in time, and the income statement relates to its activity over an interval of time. The balance sheet provides information about an organization’s assets, liabilities, and owners’ equity as of a particular date namely, the last day of the accounting or fiscal period.

The format of the balance sheet reflects the basic accounting equation: Assets equal equities. Assets are economic resources that are expected to provide future service to the organization. Equities consist of the organization’s liabilities, which are its obligations together with the equity interest of its owners. Assets are categorized as current or long-lived. Current assets are usually those that management could reasonably be expected to convert into cash within one year; they include cash, receivables (money due from customers, clients, or borrowers), merchandise inventory, and short-term investments in stocks and bonds. Long-lived assets include the land, buildings, machinery, motor vehicles, computers, furniture, and fixtures belonging to the company. Long-lived assets also include real estate being held for speculation, patents, and trademarks.

Liabilities are obligations that the organization must remit to other parties, such as vendors, creditors, and employees. Current liabilities generally are amounts that are expected to be paid within one year, including salaries and wages, taxes, short-term loans, and money owed to suppliers of goods and services. Non-current liabilities include debts that will come due beyond one year, such as bonds, mortgages, and other long-term loans. Whereas liabilities are the claims of outside parties on the assets of the organization, the owners’ equity is the investment interest of the owners in the organization’s assets. 2. 1. Income Statement The traditional activity-oriented financial statement issued by business enterprises is the income statement.

Prepared for a well-defined time interval, such as three months or one year, this statement summarizes the enterprise’s revenues, expenses, gains, and losses. Revenues are transactions that represent the inflow of assets as a result of operations that is, assets received from selling goods and rendering services. Expenses are transactions involving the outflow of assets in order to generate revenue, such as wages, rent, interest, and taxes. A revenue transaction is recorded during the fiscal period in which it occurs. An expense appears on the income statement of the period in which revenues presumably resulted from the particular expense (Meyer, 2006). 2. 1. 3 Cash Flow Statement A third important activity-oriented financial statement is the statement of cash flows. This statement provides information not otherwise available in either an income statement or a balance sheet. The statement of cash flows presents the sources and the uses of the enterprise’s cash by classifying each type of cash inflow and cash outflow according to the nature of the type of activity, such as operating activities, investing activities, and financing activities.

The statement’s operating activities section identifies the cash generated or used by operations. Investing activities include the cash exchanged to buy and sell long-lived assets such as plant and equipment. Financing activities consist of the cash proceeds from stock issuances and loans and the cash used to pay dividends, to purchase the company’s outstanding shares of its own stock, and to pay off debts (Meyer, 2006). 2. 2 FINANCIAL STATEMENT ANALYSIS Penman (2001), defines financial statements analysis as the method by which users extract information to answer their questions about the firm.

This definition implies that financial statement analysis help users of financial statement to know the statements deficiencies, what they reveal and what they do not reveal. According to Hawkins (1998), the results of financial statement analysis can play an important role in; credit decisions, valuing securities, analyzing competitors and appraising managerial performance. Brigham and Houston (1999), look at the objectives of financial statement analysis as From an investor’s standpoint; predicting the future is what financial statement analysis is all about. While from management’s standpoint; financial statement analysis is useful both to help anticipate future conditions and more important, as a starting point for planning actions that will affect the future course of events. The amount of information contained in a cooperative’s financial statements is voluminous, spanning the cooperative’s internal operations, its relationship with the outside world, and its relationship with its member or patrons. To be useful, this information must be organized into an understandable, coherent, and sufficiently limited set of data.

Financial statement analysis can be beneficial in this respect because it highlights a firm’s strengths and weaknesses. Data from a cooperative’s financial statements reveal the company’s financial condition. Examining common size statements, cash flows, and financial ratios provides management, members, and creditors a glimpse of the cooperative’s strengths and weakness. The value of a particular ration compared with a target range of values indicates the firm’s financial health, and also identifies potential problem areas. Analysis can also indicate areas of mismanagement and potential danger (Chesnick, 2000). The Flex Monitoring Team (2005), provide that financial statement analysis is important to boards, managers, prayers, lenders, and other who make judgments about the financial health of organizations.

According to them one widely accepted method of assessing financial is ratio analysis, which uses data from the balance sheet and income statement to produce values that have easily interpreted financial meaning. Establishing dimensions of financial performance provided an overarching structure for identification of relevant financial indicators. Different financial indicators measure different dimensions of financial performance, such as profitability and liquidity, and all of this information is needed to make an informed judgment about the financial health of an organization. For example, profitability indicators may indicate an organization id earning a profit, but liquidity indicators may show it is having difficulty paying its bills and capital structure indicators may show a large increase in debt. 2. 3RATIO ANALYSIS Powell (2003), defines financial ratio as the relationship of one figure in the accounts to another. Ratios are expression of the relationship between two variables. In order to produce a meaningful analysis he ratios calculated should be base on figures that have a logical connection in that industry. In addition, ratio is largely meaningless unless it is judge in the context of the industry involved and in comparison with something else, either the same ratio from years from other companies in the same industry. According to Gallagher and Andrew (2003), financial ratio is a number that expresses the value of one financial variable relative to another.

Thus financial ratio is the result you get when you divide one financial number by another. They provide that, ratios may be used to compare.

• One ratio to a related ratio

• The firm’s past and present performance

• The firm’s performance to similar firms. Salmi and Martikainen (1994), present a review of the theoretical and empirical basis of financial ratio analysis. In particular, the review sought to answer two questions relating to four selected fields in financial ratio analysis literature. What are the major research lines in financial statement analysis research? What is the logical chronology and what are the central results in the primary for of these fields? The motivation for the review was the fact that the interested parties need to know the nature and the quality of the financial information available and how to interpret and utilize it in their decision making. They conclude that “A common feature of all the areas of financial ratio analysis research seems to be that while significant regularities can be observed, they are not necessarily stable across the different ratios, industries, and time periods”. Breadley, R and Myers S (1984), provides four categories of ratios that are typically used in analyzing financial position:

• Liquidity

• Leverage

• Activity

• Profitability Liquidity ratios measure the ability to fulfill short-term commitments with liquid assets.

Such ratios are of particular interest to the cooperative’s short-term creditors. The ratios compare assets that can be converted to cash quickly to fund maturing short –term obligations.

The current ratio and the quick ratio are the two most commonly used measures of liquidity. For most cooperatives, these two ratios provide a good indication of liquidity. However, these ratios do not address the quality of liquid assets. Leverage ratios measure the extent of the firm’s “total debt” burden.

They reflect the cooperative’s ability to meet both short-and long-term debt obligations. The ratios are computed either by comparing earnings from the income statement to interest payments or by relating the debt and equity items from the balance sheet. Creditors value these ratios because they measure the capacity of the cooperative’s revenues to support interest and other fixed charges, and indicate if the capital base is sufficient to pay off the debt in the event of liquidation. Activity ratios show the intensity with which the firm uses assets in generating sales. This large, too small, or just right. If too large, funds may be tied up in assets that could be used more productively. If too small, the firm may be providing poor service to customers or inefficiently producing products. There are two basic approaches to the computation of activity ratios. The firm looks at the average performance of the firm over the year.

The second uses year end balances in the calculations. The first method is preferred if asset balances fluctuate significantly during the year. The second method is the most commonly used approach because in practice, data limitations often force outside analysts to use year –end data. Profitability ratios measure the success of the firm in earning a net return on its operations.

Profit is an important objective of a cooperative, so poor performance indicates a basic failure that, if not corrected, would probably result in the firm going out of business. Lee (1993),points out that in evaluating credit application of loans , a loan officer and credit manager who uses financial ratios as a tool to arrives at their decision on the particular firms health with an assumption of the financial rations are normally distributed, will derived a decision that departed from the actual one, if the ratios non-normally distributed. Also, many random variables have been found to be normally distributed like weight, height, age, time, snowfall, yields, dimension and other measures of interest to managers in both the public and private sectors. According to Salmi and Markainen (1994), financial ratios are widely used for modeling purposes both by practitioners and researchers. The firm involves many interested parties, like the owners, management, personnel, customers, suppliers, competitors, regulatory agencies, and academics, each having their views in applying financial statement analysis in their evaluations. Practitioners use financial ratios, for instance, to forecast the future success of companies, while the researcher’s main interest has been to develop models exploiting these ratios. Many distinct areas of research involving financial ratios can be discerned.

Historically one can observe several major themes in the financial analysis literature. The existing themes include

• The functional form of the financial ratio, i. e. the proportionality discussion,

• Distributional characteristics of financial ratios,

• Classification of financial ratios, Comparability of ratios across industries, and industry effects,

• Time-series properties of individual financial ratios,

• Bankruptcy prediction models,

• Explaining (Other) firm characteristics with financial ratios,

• Stock markets and financial ratios,

• Forecasting ability of financial analysts and financial models,

• Estimation of internal rate of return from financial statements.

While finance is a critical issue throughout a majority of the cases, it appears that emphasis on financial ratios is greatest as the firm evaluates its own internal environment and conducts a financial analysis. That is, ratio analysis provides insights into the strengths and weaknesses of the firm as well as guidance regarding the feasibility of carrying out a proposed strategy. This analysis will dictate to a significant degree the direction of management’s future decisions. That is, the management team will understand the effects of implementing various strategies upon the liquidity, leveraging, working capital, profitability, asset utilization, ash flow, and equity positions of the company (Dudley, Davis, and McGrady, 2001). 2. 4 BENCHAMARKING Edwardo and Thomas (2002), point out that before starting your calculations, remember that financial ratios are most meaningful and often only useful if compared to a benchmark. Therefore it is imperative that part of your analysis be the computation of this benchmark.

They suggest the following benchmarks; Look for industry averages. The next section provides you with some sources where you can obtain these. However, be aware that often these industry average are overly broad and may not meaningful to the specific company that you are analyzing. Thus, carefully consider how the industry is defined and make a judgment as to the relevance of these numbers to your firm. Determine the two or three main competitors for the firm you are analyzing, and compute an average of their ratios. You can then use this average as a more accurate benchmark for your company. If all else fails, compute at least the last three year’s worth of ratios for your case company, and thus develop a trend over time with which to make inferences. In fact, you may want to do this anyway as useful patterns may be found in these trends. 2. 5 TYPES OF RATIOS 2. 5. 1LIQUIDITY RATIOS Eduardo and Thomas (2002), affirm that the near term solvency of the firm is a logical starting point of your analysis. In doing this, they kept in mind that solvency is a function of liquidity and so an analysis of the balance sheet current accounts will provide some light into the liquidity of the firm.

There are two basic ratios that are traditionally used: THE CURRENT RATIO (CA/CL) This famous ratio (you probably still remember it) has a simple logic-is there enough cash or assets that will soon become cash so as to meet the firm’s short-term obligations? While your first reaction may be to look or a ratio of I as the minimum acceptable, you should know that many analysts like to see at least a current ratio of 2 since both accounts receivables and inventories may not be immediately and easily turned into cash. Also, you may want to compute the trend of this ratio over the last few years as a deterioration of liquidity often takes place over time. On the other hand, you must also be aware that a high current ration may actually indicate poor management of current assets (something we will discuss in the next section). THE QUICK RATIO ({CA-INVENTORIES}/CL) This is a way to make your liquidity measures more stringent. As you can see by the formula, you can accomplish this by not considering the firm’s inventories as a source of eventual cash. While anything above I here would typically be a good indicator, keep in mind that for many firms (especially services companies), inventories are a small portion of their assets and the quick ratio does not significantly change the results given by the current ratio. Finally, be aware that these two ratios are looking at internally generated liquidity. For many firms, a bank credit line will provide the necessary liquidity as long as they can demonstrate long run profitability.

Thus, the one true measure of liquidity is cash budget and its preparation requires more information than the typical case will give you. 2. 5. 2ASSETS UTILASATION RATIO Eduado and Thoams (2002) emphasize that, all of the ratios here are essentially a measure of how often the different assets are turning over with respect to sales. One simple but useful implication of this logic is that you can remedy deficiencies in asset management in two ways: You can think in terms of either changing the level of sales or changing the level of the assets (somewhat easier as management may have more control over this). THE TOTAL ASSET TURNOVER RATIO (SALES/TA): Measures the adequacy of the entire level of assets and as such it is a broad measure since it does not pinpoint which specific assets may be out of line. Nevertheless, as will be seen later, this turnover ratio is closely related to your profitability. Thus, be aware and use fact that through this ratio, you can explain how poor asset management may be impacting profits. The reason for this is that an excessive level of assets requires greater investment, which is costly and thus hurts your profitability measures. Nevertheless, you still need to look at the specific asset management ratios to identify where the trouble is. There are at least three specific indicators that provide you with direction when analyzing how efficient the firm is in managing its assets. Of curse as is the case in all ratio analysis, remember that not all of these ratios are relevant for all particular firms. THE INVENTORY TURNOVER (COST OF GOODS SOLD/INVENTORY): This is simply the number of times you would be theoretically selling out and restocking your inventory over on year. If you think about this equation, it follows that low turnovers indicate the possibility that too much inventory is on hand given your current level of sales. Of course, a benchmark is critical here as industries vary widely in their inventory turnovers and for some industries the level of inventories is immaterial. THE ACCOUNTS RECEIVABLE TURNOVER (SALES/ACCOUNTS RECEIVABLE): It is a formula that calculates the turnover in the firm’s credit sales (accounts receivable). However, it may be more intuitive to express this turnover in term of the number of days per year. This is simply accomplished by taking 360 and dividing it by the accounts receivable turnover. The result of this adjustment, formally known as Days Sales Outstanding (360/AR turnover), determines the average collection period on the firm’s credit sales.

Typically, there is a rule of thumb stating that 10 days beyond the firm’s credit terms indicates problems. If that’s the case, two quick options for the firm are to look into collection process (is it effective? ) or its credit policy (is it too lenient? ). If the credit terms that the firms offers are not known, an industry average should provide a good benchmark since companies compete on credit term and these are likely to be similar across the industry. THE FIXED ASSET TURNOVER RATIO (SALES/FA): This is an estimate of whether the firm’s plant capacity is adequate for its sales level. Note that a slow turnover against an industry standard or a trend of slower turnovers over time may suggest excess capacity meaning too many fixed assets for the current level of sales. On the other hand, very fast turnovers could provide you with clues about the need to expand the plant and equipment as some potential sales might be currently being lost due to the firm’s inability to produce enough. Keep in mind that all the turnover ratios discuses above can be used to make inferences about managerial effectiveness.

For example a low inventory turnover compared to the benchmark may indicate a lack of management control in this area. This type of analysis can be applied to the firm’s other assets. 2. 5. 3LEVERAGE RATIO All the usual ratios in this area are designed to identify the extent to which the firm uses creditor’s money as opposed to shareholder’s money to acquire its assets. There are a number of ratios that can be calculated that measure this characteristic but they all essentially have the same meaning. One of the more common ratios here then is the debt ratio.

The Debt-To-Assets Ratio (Total Debt/Total Assets): This simply compares the proportion of total liabilities to the proportion of total assets. Clearly the higher this proportion is, the greater the reliance of the firm on debt to finance its operations. Now, the choice of the appropriate debt/ equity mix is an internal decision. However, be aware that a majority of companies have the industry average as the heritage debt ratio. Thus, firms that are substantially beyond this level may have trouble attracting more debt or obtaining it at “normal” interest rates. The reason for this is that their potential for financial distress (bankruptcy) is greater due to the obligation that they now have to service that debt.

The Debt-Equity Ratio (Total Debt/ Common Equity): This ratio also gives you an indication of the level of debt financing that the firm carries. That is, the debt to equity ratio states the amount of money that creditors supply for every dollar supplied by shareholders. If follows that a firm with a high proportion of debt financing relative to equity financing has a high debt-to-equity ratio and a greater risk of financial distress. The TIE Ratio (Operating Income/Interest): Give that failure to timely service debt can lead to bankruptcy and liquidation, the TIE ratio provides you with clues as to how well the firm can meet its interest payments and thus avoid the possibility of bankruptcy. This well-known ratio compares the earnings that the company can use to pay its interest payments to the level of interest payments it must make. As such, you can think o it as a buffer or safety margin.

Theoretically, a TIE of I would be the minimum level to avoid default-however, depreciation expenses that were subtracted prior to arriving to the operating income (EBIT) actually give the firm a larger cushion. Nevertheless, a TIE of I would be a very scary number to see here. One very useful exercise that can be undertaken involving the TIE ratio is to develop pro-forma statements using new projections resulting from the decisions that are about to be taken. The forecasted TIE ratio from these pro-forma statements will give you useful information on the margin of safety that the firm will have as it takes on debt. (Eduardo and Thomas, 2002). 2. 5. 4PROFITABILITY RATIO Eduardo and Thomas (2002), stress that the standard profitability ratios rely heavily on net income. As such, their logic is very simple-each of these commonly use ratios looks at net income and compares it to the level of investment the firm has (assets or common equity) and to the level of sales. Net Profit Margin (Net Income/Sales): Compares net income to sales and is actually a very intuitive profitability measure since it can be interpreted as a measure of the markup the firm charges. This ratio gives you information on the ability of the firm to charge higher prices and control its costs.

That is, good profit margins could imply some type of market power such as a patent or an exclusive location or brand that is allowing the company to charge higher process and achieve higher markups. On the other hand, a high profit margin could also provide evidence of the company’s ability to generate high earnings without necessarily high prices but due to its effective control of costs. Cost Of Goods Sold As A Percentage Of Sales (Cgs/Sales): This is a commonly used ratio that provides you with information about the relationship between what it costs you to produce or purchase your products and the revenues you are generating from their sales.

Notice that implied into this percentage is the raw profit that you are earning. Return On Assets (Net Income/Total Assets): In the context of comparing net income with the level of investments, the ROA should provide you with clues as to how profitable the firm is given all of their investments. Actually, here’s where the connection with asset management comes in since for a given net income, you can see that a higher ROA can only be obtained if the firm caries a lower level of assets (that is firm is efficiently managing all of those asset categories we reviewed early). On the other hand, those weak asset turnovers that you may have computed earlier are now coming back to haunt your firm here in the form of weak profitability. Return on Equity (Net Income/Common Equity): Finally, comparing net income against the investment that the firm’s shareholders have made gives you the well-known ROE ratio.

Ultimately, a firm is evaluated on how well it maximizes shareholder wealth, and a high ROE is in most cases consistent with such goal. Nevertheless, you should know that there are some limitations to the use of ROE as a measure for shareholder wealth maximization. 2. 6 ANALYTIC REVIEW Analytic review involves a comparison of detail balances or statistical data n a period-to-period basis in an effort to substantiate reasonableness without systematic examination of the transactions comprising the account balances. Analytic review is based on the assumption that comparability of period-to-period balances and ratios shows them to be free from significant error. A well-performed analytic review not only benefits the examination by providing and understanding of the bank’s operations, but also highlights matters of interest and potential problem situations which, if detected early, might more serious problems. The basic analysis tool available to the examiner is the financial statements of the bank. Internally prepared statements and supplemental schedules, if available, are excellent supplements to an in-depth analytic review. The information from those schedules may give the examiner considerable insight into the interpretation of the bank’s basic financial statements.

Internally prepared information is not in itself sufficient to adequately analyze the financial condition of the bank. To properly understand and interpret financial and statistical data, the examiner should be familiar with the current economic conditions and any secular, cyclical, or seasonal factors, nationally, regionally, and locally, including general industry conditions. And analytic review of a bank’s financial statements requires professional judgment, imagination, and discrimination as well as an inquiring attitude. (Comptroller’s Handbook, 1998). 2. 7 LIMITATIONS OF FINANCIAL RATIO Weetman (2003), claims that ratios are primary a starting point from which to identify further questions to ask about the present position and future direction of the operations and the financing of the company. They do not provide answers in themselves. Meigs and Meigs (1995), argue that financial ratios contain the same limitations as do the dollar amounts used in the financial statement.

Financial ratio express only financial relationships, they give no indication of a company’s progress in achieving non financial goals such as improving customers satisfaction. They further argue that no ratio ever tells the “whole story” thus a high current ratio does not guarantee solvency and a low current ratio does necessarily mean that bankruptcy is near. A ratio focuses upon only one aspect of a company’s financial picture. 2. 8 EMPIRICAL WORK ON MEASUREING BANK PERFORMACE Avkiran (1995) indicate that, the financial performance of banks and other financial institutions has been measured using a combination of financial ratio analysis, benchmarking, and measuring performance against budget or a mix of these methodologies. As it known in accounting literature, there are limitations associated with use of some financial ratios. According to him, much of the current bank performance literature describes the objective of financial organizations as that of earning acceptable and minimizing the risks taken to earn this return. According to Hempel, Coleman and Simon (1986) there is a generally accepted relationship between risks and return, that is, the higher the risk the higher the expected return. Therefore, traditional measures of bank performance have measured both risks and returns. The increasing competition in the national and international banking markets, the change over monetary unions and the new technological innovations herald major changes in banking environment, and challenge all banks to make timely preparations in order to enter into new competitive financial environment.

Spathis and Doumpos (200), investigate the effectiveness of Greek banks based on their assets size. They used in their study a multi criteria methodology to classify Greek banks according to the return and operation factors, and to show the differences of the banks profitability and efficiency between small and large banks. Duncan and Elliott (2004), show that all financial performance measures as interest margin, return on assets, and capital adequacy are positively correlated wit customer service quality scores.

Generally, the concept of efficiency can be regarded as the relationship between outputs of a system and the corresponding inputs used in their production. Within the financial efficiency literature, efficiency is treated as a relative measure which reflects the devotions from maximum attainable output for a given level of input. CHAPTER THREE METHODOLOGY 3. 1 INTRODUCTION This chapter discusses the research population and the sampling techniques used for the study. It also lays emphasis on the method adopted for collecting and analyzing data and the limitation of the study. 3. 2 POPULATION AND SAMPLE The population of the study was financial statements of Ecobank Ghana Limited. In order to obtain adequate information that fairly represents the population, a sample was selected from the population. The sample was made up of the financial statements of Ecobank Ghana Limited for the financial years 2004 to 2007. 3. 3 SAMPLING TECHNIQUES The researcher adopted purposive sampling methods to select the sample from the population. This technique was appropriate because getting information from the bank concerning the selected financial years was easily available. 3. 4 SOURCES OF DATA Both secondary and primary data were used for the study. The main data for this study was gathered from the Ecobank Ghana Limited annual reports from 2004 to 2007. The annual data for Ecobank Ghana Limited during the accounting years 2004 and 2007 were used for calculating key financial ratios in order to assess the performance of the banks. 3. 4. 1 Secondary Data In addition to annual reports of Ecobank, other sources of secondary data were through reference to the library and the review of different articles, papers, and relevant previous studies. 3. 4. 2 Primary Data Primary data was obtained through the interview. The researcher interviewed managing director of Ecobank to find out the importance and limitations of ratio analysis in decision making.

The interview was conducted at the office of the managing director and last for forty minutes. 3. 5 RATIOS USED FOR THE ANALYSIS 3. 5. 1 PROFITABILITY RATIOS: Operating profit margin = profit before interest and tax/capital employed. Return on equity = profit after tax/equity capital Return on Assets = profit after tax/total equity 3. 5. 2 LIQUIDITY RATIO Current ratio = current assets/current liabilities 3. 5. 3LEVERAGE RATIOS Gearing ratio = debt/equity 3. 5. 4 INVESTORS RATIOS Earning per share = earnings/number of shares Dividend per share = dividend/number of ordinary shares Payout ratio=DPS/EPS Book value per share = book value of equity /number of ordinary shares 3. 6 METHODS OF DATA ANALYSIS Both qualitative and quantitative tools were used to analyze data collected. This means textual and numerical explanations were given in the analysis. In addition, diagrams were used to analyze data. In order to process the data collected and present it in a form that can easily and appropriately depict the objectives of the study, Microsoft word and Microsoft excel were employed for the purpose of clearer and simpler presentation of the final report. 3. 7 LIMITATION OF THE STUDY The major problem of the study was the unwillingness on the part of management of Ecobank Ghana Limited to give information. This did not allow the researcher to write a comprehensive report. Another constraint was the time frame for the study. The study was undertaken alongside the heavy workload of the semester.

Due to the short period, there was not enough time for in-depth investigation into certain areas and issues. CHAPTER FOUR DATA ANALYSIS AND PRESENTATION 4. 1 INTRODUCTION This chapter seeks to assemble and analyze the data collected in order to draw reasonable conclusion. 4. 2 PROFITABILITY RATIOS Profitability ratios measure the firm’s efficiency of operation. It gives an indication as to how successful the mangers of a company have been in generating profitability. 4. 2. 1 PROFIT GROWTH [pic] From the above diagram, the profit before tax (PBT) and profit after tax (PAT) in 2004 were GH? 14. 8million and GH? 8. 8million respectively. In 2005 PBT increased to GH? 18. 7million representing 26. 4%. PAT in the same year increased to GH? 12million representing 36. 4%. In 2006 PBT and PAT were ? 24million and GH? 16. 5million respectively; representing 28. 3% and 37. 5% increased in PBT and PAT respectively. In 2007 PBT and PAT increased to ? 27. 3million and 19. 4 million respectively; registering 13. 8% and 17. 6% increased in PBT and PAT respectively. This signifies that management of Ecobank had been successful in generating profit for the company. 4. 2. 2 RETURN ON EQUITY It measures the rate of return on the shareholder’s investment in the company. Table 4. 1 |YEAR |RATIO |PERCENTAGE CHANGE | |2004 |0. 367 | | |2005 |0. 432 |6. 5 % increase | |2006 |0. 389 | 4. 3% decrease | |2007 |0. 00 |1. 1%increase | From the above table, ROE in 2004 was 0. 367 representing 36. 7%. In 2005 it increased to 0. 432(43. 2%) showing 6. 5% increase. In 2006 ROE decreased to 0. 389(38. 9%) representing 4. 3% decrease. In 2007 ROE increased by 1. 1% to 40%. This signifies that on the average, the rate of returns of shareholders investment in Ecobank is 39. 7% which implies that, on average Ecobank maximizes its shareholder wealth by 39. 7%. 4. 2. 3 RETURN ON ASSETS (ROA) ROA provides clues as to how profitable the firms are given all of their investments. Chart 2 [pic] From the above diagram, ROA in 2004 was 0. 42 representing 4. 2%. In 2005 ROA increased to 4. 3% representing 0. 10% increase. In 2006 ROE deceased to 3. 5% representing 0. 8% dcrease. In 2007, ROA increased to 4. 4% representing 0. 9% increase in ROA. This shows that on average Ecobank has ROA of 4. 1% which means that Ecobank makes profit of 4. 1% on all their investments. 4. 2. 4 OPERATING PROFIT MARGIN It indicates the relative efficiency of the business after taking into account all sales revenues and operational expenses.

Table 4. 2 |YEAR |RATIO |PERCENTAGE CHANGE | |2004 |23. % | | |2005 |24. 06% |0. 16 % increase | |2006 |26. 16% |2. 1% decrease | |2007 |24. 15% |2. 01% decrease | From the table above, the operating profit margin for Ecobank in 2004 was 23. 9%. In 2005 it increased to 24. 06% registering 0. 16% increase. In the year 2006, it increased by 2. 1% to 26. 16%. In 2007 it decrease from 26. 16% to 24. 15% registering 2. 1% decrease in operating profit margin. This signifies that Ecobank on average makes a profit of 24. 6% after taking into account all revenues and operational expenses. 4. 3 LIQUIDITY RATIO Liquidity ratios are used to judge firm’s ability to meet short term obligation. If a firm does not have sufficient liquidity, it may not survive. 4. 3. 1 CURRENT RATIO It indicates the ability of a company to meet its short term liabilities as they fall due out of its short term assets. Table 4. 3 |YEAR |RATIO |PERCENTAGE CHANEGE | |2004 |1. 07 | | |2005 |1. 105 |0. 18% decrease | |2006 |1. 127 |1. 99% increase | |2007 |1. 156 |2. 57% increase | From the above table, the current ratio of Ecobank in the years 2004 was 1. 107:1. In 2005 it decreased to 1. 105:1 representing 0. 18% decrease in current ratio. In 2006, it increased to 1. 127:1 registering 1. 9% increase in current ratio. In 2007, it further increased to 1. 156:1 representing 2. 57% increase. This shows that the company does not have a short term liquidity problem as current ratios for the relevant years exceed one. However the current ratio of Ecobank needs to be improve to meet the require ratio of 2:1. 4. 4 GEARING RATIO It is an expression of the relationship between the proportions of finance provided by equity and lenders.

Gearing ratio greater than 0. 6 is high and less than 0. 2 is low. Chart 3 [pic] From the diagram above, the gearing ratio of Ecobank in year 2004 was 0. 241. In 2005 it increased to 0. 409 showing a percentage increase of 19. 8%. In 2006 the gearing ratio decrease by 4. 3% to 0. 366. In 2007, it however increase significantly to 1. 147 registering 78. 1% increase.

This shows Ecobank has relatively high proportion of borrowed funds in its capital structure hence it is said to be leveraged. 4. 5 INVESTORS RATIO 4. 5. 1 EARNING PER SHARE (EPS) AND DIVIDEND PER SHARE. EPS indicates profit due to ordinary shareholders. It is widely used measure of a company’s profitability. DPS on the other hand indicates the dividend declared or interim and profit retention policy of the company. Chart 4 [pic] From the diagram above, the EPS and DPS of Ecobank in the financial year 2004 were 0. 25 and 0. 0351 respectively. In 2005 EPS decreased to 0. 078 registering 4. 7% decrease in EPS. DPS in the same year increased from 0. 0351 to 0. 0495 representing 1. 44% increase in DPS. In 2006 EPS and DPS increased to 0. 103 and 0. 0673 respectively. This shows percentage increase of 2. 5% and 1. 78% in EPS and DPS respectively. In 2007, EPS increased to 0. 121 registering 1. 8% rise in EPS. DPS on the other hand increased from 0. 0673 to 0. 083 representing 1. 57% rise. 4. 5. 2 NET ASSETS (BOOK VALUE) PER SHARE This indicates the historical cost of equity per ordinary shares as compared to the market current price per share. Chart 5 [pic] From the above diagram, the net assets per share for Ecobank in 2004 was GH? 0. 341. In 2005 it decreased to GH? 0. 185. However in 2006 it increased to GH? 0. 275. In 2007 it decreased to GH? 0. 274 This signifies that Ecobank has an average cost of equity as of 26. 9% as compared to the current market price of shares of Ecobank. 4. 5. 3 DIVIDEND PAYOUT RATIO It is the fraction or percentage of earnings paid to common shareholders in the form of cash dividend. It is commonly used in discussion on dividend policy and share valuation.

Table 4. 4 |YEAR |RATIO |PERCENTAGE CHANGE | |2004 |28. 8% | | |2005 |63. 46% |35. 38% increase | |2006 |65. 34% |1. 88% increase | |2007 |68. 59% |3. 25% increase | From the table above, dividend payout ratio of Ecobank in 2004 was28. 08%. In 2005, it increased to 64. 4% registering 35. 38% increase. In 2006, it further increased to 65. 34% showing 1. 8% increase in dividend payout ratio. In 2007, it increased to 68. 59% registering 3. 25% increase. This illustrates that on average Ecobank pays 63. 4% of earnings to common shareholders in the form of cash dividend. Also, since the dividend payout ratio of Ecobank has been increasing through out the years, Ecobank is doing well in terms of dividend payment to its shareholders. 4. 6 ANALYSIS OF INTERVIEW. In order to find out the usefulness and limitations of the financial statement analysis for decision making by management, the researcher interviewed the managing director of Ecobank Ghana Limited, in the person of Mr Samuel Ashitey Adjei. Below is the analysis of the interview: According to him, Ecobank has consistently delivered strong financial results. It remains a profitable and financially sound bank with a solid and quality asset base. Profitability performance has been impressive with a consistent increase in PBT and PAT. Ecobank has delivered a decent growth year on year in both PBT and PAT. In 2007,PAT grew by 18%. Net interest income was up by 22%. Fees and commission income was upby38%. Such a strong profitability performance according to him underscores the bank commitment to growing superior returns for shareholders. In light of the above results, the Board of Directors propose a dividend payment of GH? 0. 083 per share for a total dividend ofGH? 13. 38million. This represent a payment ratio of 90% of PAT transfer to statutory reserve. Ecobank asset-mix continues to be healthy, balancing liquidity and profitability.

The growth in assets was funded by 30% increase in deposits from GH? 336 million to GH? 438million. Total shareholders funds also grew by 13% from GH? 42. 5million to GH? 48. 1million. EBG’s deposit book (including inter bank and agency funding) grew by 32% and was below the industry total deposit growth of 42%. As such, the bank’s market share of deposits dropped to 8. 8% from 9. 5% in 2005. Growth in the bank’s deposit base was supported by the aggressive penetration into the retail market, which saw the number branches more than double in 2006. Despite the increased footprint, funding remains predominantly wholesale, with deposits from individuals contributing 40% to total deposits as at year end 2006 against a 70% target set for 2008. By type, current accounts made up a higher 71% of total deposits, with the remainder split between time deposits (25%) and cash collateral (4%). EBG’s liquidity ratio continued to trend downwards, largely due to the decline in cash and liquid assets, with the ratio dropping to a review period low of 69% during 2006 and 2005(74%). Despite the decline, levels of the ratio comfortably meet regulatory requirements, while also exceeding the industry average of 64%. Given the short-dated nature of the deposit book, EBG exhibited sizeable cumulative liquidity gaps across all maturities, which elevates liquidity risk. However, the banks diversified deposit base and high liquidity ratio, mitigate this risk. Capital growth was predominantly driven by proceeds from EBG’s public floatation which raised capital by GH? 9. 1million, as well as retained earnings for the year.

This increase was moderated by a proposed dividend of GH? 10. 8million, which lifted the dividend payout ratio to a review period high of 66%. Although EBG’s capital/total assets ratio increased to 9. 3% in 2006, it remained below the industry average of 11. 4%. Despite this, the bank’s risk weighted capital adequacy (RWCA) ratio amounted to 21% as at year end 2006, comfortably above the 10% statutory requirement. According to him, financial ratio analysis is neither sophisticated nor complicated. It is nothing more than simple comparisons between specific pieces of information pulled your company’s balance sheet and income statement. Financial ratio analysis helped management to examine the current performance of their company in comparison to past periods of time. This helped them identified problems that need fixing. Even better, it can direct management attention to potential problems that can be avoided. In addition, ratios are used to compare the performance of your company against that of your competitors or other members of your industry. On limitation of ratios for decision making, he provided that ratios are based on the summarized year end information which may not be a true reflection of the overall year’s results. It is difficult to generalize about whether a particular ratio is ‘good’ or ‘bad’. For example a high current ratio may indicate a strong liquidity position, which is good or excessive cash which is bad.

Similarly Non current assets turnover ratio may denote either a firm that uses its assets efficiently or one that is under capitalized and cannot afford to buy enough assets. To conclude, he provided that Ecobank delivery of quality of service and financial success continue to receive both domestic and international recognisiton. Ecobank has a long term debt rating of AA- and a short term debt rating of A+ from Global Credit Rating. The long term rating of AA-, demonstrates high credit quality, with adverse changes in business, economic or financial conditions not significantly affecting investment risk.

Also, the short term rating of A+ shows the highest certainty of timely payment. CHAPTER FIVE SUMMARY, CONCLUSION AND RECOMMENDATIONS 5. 1 SUMMARY OF FINDINGS The profitability ratios namely Operating Profit margin, Return on Equity (ROE) and Return on Assets (ROA) shows that management of Ecobank had been successful in generating profit from 2004 to 2007. Operating profit margin of Ecobank in 2004, 2005, 2006 and 2007 were 23. 9%, 24. 06%, 26. 16% and 24. 15% respectively. This signifies that Ecobank on average makes a profit of 24. 6% after taking into account all revenues and operational expenses. Return of Equity of Ecobank in 2004, 2005, 2006 and 2007 were 36. 7%, 43. 2%, 38. 9% and 40% respectively. This shows that on average Ecobank maximizes its shareholder wealth by 39. 7%. Return on Assets of Ecobank was 4. 2%, 4. 3%, 3. 5% and 4. 4% for the years 2004, 2005, 2006 and 2007 respectively. This means that Ecobank on average makes profit of 4. 1% on all their investments.

The current ratio of Ecobank for the financial years 2004, 2005, 2006 and 2007 was 1. 107:1, 1. 105:1, 1. 127:1 and 1. 156:1 respectively. This shows that in the short term Ecobank do not have liquidity problem since the current ratio for the various year was greater than one (1). However the current ratio of Ecobank was less than the required ratio of 2:1. The gearing ratio of Ecobank for the financial years 2004, 2005 and 2006 were 0. 24, 0. 41 and 0. 37 respectively which implies that Ecobank do not have going concern problem since the gearing ratios for the above financial years were less the 0. 6. However in 2007 the gearing ratio of Ecobank increased to 1. 15 which depicts that Ecobank was highly leveraged because the capital structure of Ecobank in 2007 showed that there was more debt capital than equity capital. The investors’ ratios namely earning per share (EPS), Dividend per share (DPS), Book value per share and Dividend payout showed how Ecobank sufficiently rewarded its shareholders in terms of earnings and dividend. EPS of Ecobank for the financial years 2004 was GH? 0. 125. In 2005 and 2006 it decreased to GH? 0. 078 and increased to GH? 0. 103 respectively. In 2007, it increased further to GH? 0. 121. This depicts that on average Ecobank make profit of GH? 0. 1068 per share to ordinary shareholders. DPS on the other hand was GH? 0. 035, 4. 7%, GH? 0. 0673 and GH? 0. 083 for the financial years 2004, 2005, 2006 and 2007 respectively. This signifies that Ecobank on average Ecobank pays GH? 0. 581 of its earnings per share as dividend to shareholders. Net Asset per share of Ecobank for the financial year 2004 was GH? 0. 272. In 2005,it increased to GH? 0. 275. In 2006, it decreased to GH? 0. 185 and in 2007, it increased to GH? 0. 341%. This depicts Ecobank has an average cost of equity as of GH? 0. 26 as compared to the current market price of shares of Ecobank. It was found out that, the limitation of financial ratios in making decision was that ratios are based on the summarized year end information which may not be a true reflection of the overall year’s results. It is difficult to generalize about whether a particular ratio is ‘good’ or ‘bad’ 5. 2 CONCLUSION From the findings of the study, Ecobank had performed well in terms of profitability as Profit after tax, profit before tax, return on equity and return on assets has been increasing over the years. Although, Ecobank does not have short term liquidity problem it current ratio is not up to the required ratio of 2:1. Further, Ecobank has long term solvency problem as the gearing ratio of the bank in the financial year 2007 was high which will prevent potential investors from investing in the bank because of the high financial risk. The investors’ ratios of Ecobank namely earning per share and dividend per share and the net book value per share prove that Ecobank had sufficiently rewarded its shareholders in terms of earnings and dividend. These imply that ratios analysis if used intelligently and with good judgment, can provide useful insights into the firm’s performance. 5. 3 RECOMMENDATIONS The following recommendations will help improve the financial performance of Ecobank and other players in the banking industry.

Ecobank should expand it revenue by giving more loans and advances to customers and increase its fees

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