BALANCE SHEET ANALYSIS
SOME IMPORTANT QUESTIONS
1.Current Assets Vs Current Liabilities Current Assets are the assets of the company which can be converted into cash within 12 months which include inventories, raw material, work-in-progress, finished goods, cash and bank balances. Current Liabilities are the amounts that are to be payable to trade creditors as well as repayment of interest and installments of bank loans within 12 months. The difference between current assets and current liabilities gives the working capital of the company.
2. What are the Contingent Liabilities include claims against a company not acknowledged by it as debt. It could be taxes, penalties or conversion of non-fund commitment into a funded liability at a later date.
3. Name the important financial ratios which are vital to gauge the financial health of the organization. Liquidity Ratios, Leverage/Solvency Ratios, Activity Ratios and Profitability Ratios.
4. What is the importance of Liquidity Ratios? Liquidity Ratios (Current and Quick ratio) helps to find out the ability of the business concern to pay the short term liability of its liquidity. Any adverse position in liquidity leads to sudden fall of the unit. Ideal Current & Quck Ratio is 2:1 & 1:1 respectively. Acceptable Ratio as per our Loan Policy guidelines is 1.33:1 for the limits enjoying above `6.00 crores and 1.15:1 for the business concerns availing limits of below `6.00 crores. Any deviation below the required ratio requires ratification of Higher Authority. Current Ratio is always to be read along with Quick Ratio. A fall in the Quick Ratio in comparison to the Current Ratio indicates high inventory holdings.
5. Which ratio is to be taken into consideration for sanction of term loans? Debt Service Coverage Ratio (DSCR), it helps to know the capacity of the firm to repay the Long Term Loan Instalment and Interest. Ideal DSCR is 2:1. The higher the DSCR, higher may be the EMI amount and lower may be the number of EMIs. However, banks may also consider DSCR 1.20:1 where fixed income generation is assured, such as Rent Receivables etc.
6. What is Gearing Ratio? Gearing Ratio (GR) represent a group of financial ratios that compare some form of owner's equity (capital) to debt, or funds borrowed by the company. Gearing ratio is a measure of financial leverage that demonstrates the degree to which a firm's operations are funded by equity capital versus debt financing. This ratio is required to assess the eligibility for non-funded limits. The formula is Total outside liabilities+proposed nonfund based limits / Tangible Networth – Non Current Asset. The ideal ratio should be below 10
Profitability Concepts
1 What is the relevance of profits Augment economic capital, Helps retained earnings to increase capital base, Improves Investors confidence, Index of efficient use of funds Makes a viable organization
2 What is profit and profitability Profit represents an absolute figure Profitability is measured by Ratios and shows operational efficiency
3 Name few profitability ratio ROA,NIM,ROE, Book value,
4 What is ROA, how it is measured and what is the ideal ROA ROA is Return on Asset and is the ratio of net profit to total assets. The standard measure of ROA globally is 1%
5 What is NIM, how it is arrived and what is desirable NIM NIM is Net Interest Margin and is the ratio of net interest income to average earning assets. The desired NIM is above 3%
6 What is ROE ROE is Return on Equity / Net worth. It is ratio of Net profit to Average Net worth (Capital + Reserve- intangible assets)
7 What is Book Value and how it is arrived It is net worth divided by No. of shares. Market price of share generally factors book value.
8 What is EPS EPS is Earning Per Share. It is the ratio of net profit to No. of shares
9 What is CRAR, what it indicates Capital to Risk Weighted Asset Ratio. The total capital, consist of Tier I & Tier II Capital as a ratio of Risk Weighted Assets. It indicates the soundness and risk bearing ability of a Bank.
10 What do you understand by Yield on Advances Interest Income on advances divided by average advances indicates average yield on advances. This ratio enables cost benefit assessment from various loan products.
11 What is yield on Investments Interest and dividend income on investment divided by average investments indicate yield on investments.
12 What is the cost of deposit Interest paid on deposit divided by average deposits is called cost of deposit. It consists of Current, SB and Term Deposit.
13 Which are the operational efficiency ratios, Cost – Income ratio and Burden ratio is called as operational efficiency ratio.
14 What is Cost Income ratio Non-Interest Expenditure divided by Net Total Income
15. Credit Risk Mitigation : Ans : Techniques used to mitigate the credit risks through exposure being collateralised in whole or in part with cash or securities or guaranteed by a third party.
16. Non Performing Assets (NPA) : Ans : An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
17. Net NPA : What is our Net Npa percentage in last B/Sheet. ? Ans : Gross NPA – (balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held). It is 6.37 %
18. Please tell about “ Off Balance Sheet Exposure” Ans: Off-Balance Sheet exposures refer to the business activities of a bank that generally do not
nvolve booking assets (loans) and taking deposits. Off-balance sheet activities normally generate fees, but produce liabilities or assets that are deferred or contingent and thus, do not appear on the institution's balance sheet until and unless that become actual assets or liabilities.
19.What do you mean by “ Operating profit before provisions” Ans: Net of total income and total operating expenses.
20.What is “Net operating profit” Ans: Operating profit before provision minus provision for loan losses, depreciation in investments, write off and other provisions.
21.What do you mean by “PBT” Ans: Profit before tax (Net operating profit +/- realized gains/losses on sale of assets)
22.Whado you mean by “Profit after tax (PAT)” Ans: Profit after tax – dividend paid/proposed.
23.What is Net Non-Interest Income Ans: The differential (surplus or deficit) between non-interest income and non-interest expenses as a percentage to average total assets.
24.Net Interest Income (NII) Ans: NII is the difference between the interest income and the interest expenses.
25.What is NIM ? NIM (domestic)
Net interest margin is the net interest income divided by average interest earning assets.
26.Credit Risk Mitigation
Ans: Techniques used to mitigate the credit risks through exposure being collateralised in whole or in part withcash or securities or guaranteed by a third party. Operating profit before provisions Ans: Net of total income and total operating expenses. Net operating profit Ans: Operating profit before provision minus provision for loan losses, depreciation in investments, write off and other provisions. Profit before tax (PBT) Ans: (Net operating profit +/- realized gains/losses on sale of assets) Profit after tax (PAT) Ans: Profit after tax – dividend paid/proposed. Retained earnings Ans: Profit after tax – dividend paid/proposed.
SOME IMPORTANT QUESTIONS
1.Current Assets Vs Current Liabilities Current Assets are the assets of the company which can be converted into cash within 12 months which include inventories, raw material, work-in-progress, finished goods, cash and bank balances. Current Liabilities are the amounts that are to be payable to trade creditors as well as repayment of interest and installments of bank loans within 12 months. The difference between current assets and current liabilities gives the working capital of the company.
2. What are the Contingent Liabilities include claims against a company not acknowledged by it as debt. It could be taxes, penalties or conversion of non-fund commitment into a funded liability at a later date.
3. Name the important financial ratios which are vital to gauge the financial health of the organization. Liquidity Ratios, Leverage/Solvency Ratios, Activity Ratios and Profitability Ratios.
4. What is the importance of Liquidity Ratios? Liquidity Ratios (Current and Quick ratio) helps to find out the ability of the business concern to pay the short term liability of its liquidity. Any adverse position in liquidity leads to sudden fall of the unit. Ideal Current & Quck Ratio is 2:1 & 1:1 respectively. Acceptable Ratio as per our Loan Policy guidelines is 1.33:1 for the limits enjoying above `6.00 crores and 1.15:1 for the business concerns availing limits of below `6.00 crores. Any deviation below the required ratio requires ratification of Higher Authority. Current Ratio is always to be read along with Quick Ratio. A fall in the Quick Ratio in comparison to the Current Ratio indicates high inventory holdings.
5. Which ratio is to be taken into consideration for sanction of term loans? Debt Service Coverage Ratio (DSCR), it helps to know the capacity of the firm to repay the Long Term Loan Instalment and Interest. Ideal DSCR is 2:1. The higher the DSCR, higher may be the EMI amount and lower may be the number of EMIs. However, banks may also consider DSCR 1.20:1 where fixed income generation is assured, such as Rent Receivables etc.
6. What is Gearing Ratio? Gearing Ratio (GR) represent a group of financial ratios that compare some form of owner's equity (capital) to debt, or funds borrowed by the company. Gearing ratio is a measure of financial leverage that demonstrates the degree to which a firm's operations are funded by equity capital versus debt financing. This ratio is required to assess the eligibility for non-funded limits. The formula is Total outside liabilities+proposed nonfund based limits / Tangible Networth – Non Current Asset. The ideal ratio should be below 10
Profitability Concepts
1 What is the relevance of profits Augment economic capital, Helps retained earnings to increase capital base, Improves Investors confidence, Index of efficient use of funds Makes a viable organization
2 What is profit and profitability Profit represents an absolute figure Profitability is measured by Ratios and shows operational efficiency
3 Name few profitability ratio ROA,NIM,ROE, Book value,
4 What is ROA, how it is measured and what is the ideal ROA ROA is Return on Asset and is the ratio of net profit to total assets. The standard measure of ROA globally is 1%
5 What is NIM, how it is arrived and what is desirable NIM NIM is Net Interest Margin and is the ratio of net interest income to average earning assets. The desired NIM is above 3%
6 What is ROE ROE is Return on Equity / Net worth. It is ratio of Net profit to Average Net worth (Capital + Reserve- intangible assets)
7 What is Book Value and how it is arrived It is net worth divided by No. of shares. Market price of share generally factors book value.
8 What is EPS EPS is Earning Per Share. It is the ratio of net profit to No. of shares
9 What is CRAR, what it indicates Capital to Risk Weighted Asset Ratio. The total capital, consist of Tier I & Tier II Capital as a ratio of Risk Weighted Assets. It indicates the soundness and risk bearing ability of a Bank.
10 What do you understand by Yield on Advances Interest Income on advances divided by average advances indicates average yield on advances. This ratio enables cost benefit assessment from various loan products.
11 What is yield on Investments Interest and dividend income on investment divided by average investments indicate yield on investments.
12 What is the cost of deposit Interest paid on deposit divided by average deposits is called cost of deposit. It consists of Current, SB and Term Deposit.
13 Which are the operational efficiency ratios, Cost – Income ratio and Burden ratio is called as operational efficiency ratio.
14 What is Cost Income ratio Non-Interest Expenditure divided by Net Total Income
15. Credit Risk Mitigation : Ans : Techniques used to mitigate the credit risks through exposure being collateralised in whole or in part with cash or securities or guaranteed by a third party.
16. Non Performing Assets (NPA) : Ans : An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
17. Net NPA : What is our Net Npa percentage in last B/Sheet. ? Ans : Gross NPA – (balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held). It is 6.37 %
18. Please tell about “ Off Balance Sheet Exposure” Ans: Off-Balance Sheet exposures refer to the business activities of a bank that generally do not
nvolve booking assets (loans) and taking deposits. Off-balance sheet activities normally generate fees, but produce liabilities or assets that are deferred or contingent and thus, do not appear on the institution's balance sheet until and unless that become actual assets or liabilities.
19.What do you mean by “ Operating profit before provisions” Ans: Net of total income and total operating expenses.
20.What is “Net operating profit” Ans: Operating profit before provision minus provision for loan losses, depreciation in investments, write off and other provisions.
21.What do you mean by “PBT” Ans: Profit before tax (Net operating profit +/- realized gains/losses on sale of assets)
22.Whado you mean by “Profit after tax (PAT)” Ans: Profit after tax – dividend paid/proposed.
23.What is Net Non-Interest Income Ans: The differential (surplus or deficit) between non-interest income and non-interest expenses as a percentage to average total assets.
24.Net Interest Income (NII) Ans: NII is the difference between the interest income and the interest expenses.
25.What is NIM ? NIM (domestic)
Net interest margin is the net interest income divided by average interest earning assets.
26.Credit Risk Mitigation
Ans: Techniques used to mitigate the credit risks through exposure being collateralised in whole or in part withcash or securities or guaranteed by a third party. Operating profit before provisions Ans: Net of total income and total operating expenses. Net operating profit Ans: Operating profit before provision minus provision for loan losses, depreciation in investments, write off and other provisions. Profit before tax (PBT) Ans: (Net operating profit +/- realized gains/losses on sale of assets) Profit after tax (PAT) Ans: Profit after tax – dividend paid/proposed. Retained earnings Ans: Profit after tax – dividend paid/proposed.
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