Volume 4, Issue 12, December – 2019 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165

Evaluation of Financial Performance Analysis of

Commercial Bank of Ethiopia
Yichilal Simegn Filatie
Lecturer, Department of Accounting and Finance
College of Business and Economics
Debre Markos University
Debre Markos, Ethiopia

Abstract:- This study is conducted to evaluate the financial financial statement of a firm used by management creditor,
performance of commercial bank of Ethiopia, in terms of investors and others to make judgment about the operating
Capital adequacy, assets quality, management capability, performance of the firm(Foster G,1978). So, this study
earnings, liquidity and sensitivity to market risk. In this focuses on the evaluation of financial performance of
study the data were collected from secondary data sources. Commercial bank of Ethiopia to measure its profitability and
The secondary data are taken from the audited financial other related risks and also it shows banks strength and
statement of commercial bank of Ethiopia. The collected weakness. Generally, the main purpose of this study is to
data have been analyzed and presented using different measure profitability, liquidity and credit management of
ratios. The findings of the study revealed that the financial commercial bank of Ethiopia, to discussed the financial ratio
performance of the bank for the period under study was measurement and analysis, and also to assess the overall
reasonably good when it is evaluated using audited financial performance and condition of the bank.
financial statements. Since debt is known as a cheapest
source of fund for business entities than other sources, the A. Statement of the Problem
bank shall try to increase debt ratio to a reasonable extent If management of a firm helps to maximize bank
and raise additional finance to expand the business as well performance it takes advantage of the banks strength and
as increase profitability. correct its weaknesses. In this regard the management body of
the bank highly on through figures of financial statement.
Keywords:- Commercial Bank of Ethiopia, Financial However the absolute amount of priority or asset and
Performance, Financial Analysis. liabilities shown in accounts are not usually a particular
meaning full criterion on for evaluating financial performance.
I. INTRODUCTION Appropriate techniques of financial performance evaluations
are rare to see in the bank. Therefore information required for
The evaluation of financial performance was the subject management, like if the bank profitable, whether the bank
of how will a firm can use asset from its primary mode of employs effectively its resource and if the bank borrows
business and generate revenue. If properly analyzed and beyond its capacity or limit (Hempl, G, 1999). At large the
interpreted financial statements could provide valuable insight accounting profession focuses on how financial statement can
into the firm’s performance. Analysis of financial statement is be used for financial performance evaluation. Therefore the
the interest of lenders (short term as well as long term), analyzed financial statement helps the manager to assess the
investors, security analysis, managers and others (Chandra, current, past as well as the future financial strength and
2001). The study emphasis on different aspect that would be weakness of firm and makes appropriate decision (Gitman, L.
considered as key factors for evaluating the financial condition G 2004).
and performance of most business organization, some of these
factors are site and ranking a growth records, financial Accordingly, the study focuses on evaluating the bank’s
performance, and quality of management, location, labor financial performance and financial position both in firm’s
management relations, liquidity, leverage, profitability and position in time and on its operation over the period under
pattern of exiting stock holding. Each of those factors has their study. Furthermore, to the best of the researcher’s knowledge,
own contribution on general growth of company, therefore to only few studies have been conducted on evaluation of
check overall growth of the company consistent evaluation of financial performance of financial institution in Ethiopia in
each factor need to be vital (Sinha, 2010). general and commercial bank of Ethiopia in particular in the
Pre and post financial liberalization. Thus, this study
Financial analysis involves methods of reclassifying and attempted to fill this gap by evaluating the financial
interpreting financial data contained in financial statement performance of commercial bank of Ethiopia.
using help of different tools of analysis. By using the financial
performance more important as starting point for planning
actions that affects future event information contained in the

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B. Objectives of the study C. Overview of Financial Analysis

 General Objective  Purpose of financial statement analysis

The main objective of this study is to analyze the Financial statement analysis is information processing
financial performance of Commercial bank of Ethiopia. system designed to provide data for decision making. The
information is basically derived from published financial
 Specific Objectives statement but in the process of analysis use is also made of
To achieve the general objective the following specific non accounting data such as stock price and aggregate
objectives were addressed. economic indicator. Users of financial statement information
 To evaluate the financial performance of commercial bank system are decision maker concerned with evaluating the
of Ethiopia. economic situation of a firm and predicting its future course.
 To examine how Commercial bank of Ethiopia manage Given the various use and motives it is obvious that no single
and utilize its total asset to generate revenue. information will satisfy the entire requirement (Abdu’s Sam
 To evaluate the financial position of the commercial bank ad, 2004).
of Ethiopia.
 Users of financial analysis
C. Scope of the study Financial analysis can be undertaken by management of
This study was conducted on evaluation of financial the firm, or parties outside the firms: owners, creditors,
performance of the Commercial bank of Ethiopia. The study investors and other. The nature of the analysis will differ
was restricted in evaluating financial performance of bank by depend on the purpose of analyst. Creditors: are interested in
analyzing the four year (2015-2018) financial statement of the the firm’s ability to meet their claim over a short period of
bank. time. Their analysis will, therefore, confine with the
evaluation of the firms liquidity position. Suppliers of long-
II. LITERATURE REVIEW term debt: are concerned with the firm’s long term solvency
and survival. They analyzed the firm’s profitability over time,
A. Overview of the Financial Statement its ability to generate cash to be able to pay interest and repay
The economic event and activities that affect the principal the relationship between various sources of funds.
company and that can be translated in the accounting numbers Investors: investors who are invested their funds in firms share
are reflected in the company’s financial statements. Some are most concerned about firms earning. Management:
financial statement provides a picture of the company at a management of the firm would be interested in every aspects
moment in time. Other describe that took place over time. of the financial analysis. It is their overall responsibility to see
Both provide a basis for evaluating what happened. For that the resources of firm are used most effectively and
example, what rate of growth can be expected next year? efficiently, and that the firm’s financial condition is sound
These trends provide insight into a market acceptance, profit (Brigham-2004).
and liquidity. Consequently a company’s financial statement
can be used for various purposes: as analytical tool, as a basis D. Ratio Analysis
for prediction and as a measure of accountability. Ratio analysis has been the major tool used in the
interpretation and evaluation of financial statement for
B. Types of Financial Statements investment decision making. Generally such analysis involves
1) Balance sheet: it is a statement of financial possession, the breaker down of examined financial report into a
presents the financial possession of a business enterprise component part (e.g. fixed and current asset) which are then
on a specific date. It also describe as a photograph of a evaluated in relation to other and exogenous standards. Ratio
business at a moment in time is indicator of firm’s deficiencies such as poor liquidity or low
2) Income statement: income statement measures the profitability. Thus the negative function of ratio is emphasized
performance over some period of time, usually quarter or and favorable ratio may mean nothing unfavorable ratio is
year. significant (Ahmad and Hassan, 2007).
3) Statement of cash flow: statement of cash flow shows the
users why firm’s investment financial structures have  Objective of ratio analysis
changed between balance sheet data. Simultaneously The major objective of ratio analysis is considered to be
explain the changes that have been taken place in the firms facilitation of statement interpretation, this is basically
non-cash asset, liability and stock holder equity account achieved by reducing the large number of financial statement
over the same time period. The cash flow statement items to relatively small set of ratio such as ratio relate the
summarizes cash inflow and outflow of a company broken absolute value financial items to common basis(total asset)
down in to three principal activities (Horngren S.E, 2001): allowing a meaningful comparison of financial data both over
time and across firms for a given time period, however
financial ratio are not intended to provide definite answer their
real value is derived from the question they provokes. Ratios

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Volume 4, Issue 12, December – 2019 International Journal of Innovative Science and Research Technology
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are therefore symptom of firms economic condition intended  Profitability Ratio
to guide the analysis in the financial investigation (Samad and A company should earn profit to survive and grow over a
Hassan, 2000). long period of time. Profit are essential, but it would be wrong
to assume that every action initiated by a management of the
 Liquidity ratio company should be arrived at a maximizing a profit is looked
Liquidity refers to the ability of the firm to meet its up on a term of a base since some firms always want to
obligation in the short run, usually one year. Liquidity ratios maximize profit at a cost of employees, customer and society.
are generally based on the relationship between current asset Except for such frequent cases, it is fact that sufficient profit
the source for meeting short term obligation) and current must be earned to sustain the operation of the business to be
liability. From the important liquidity ratios are: able to obtain funds from investors for expansion and growth
and to contribute towards the social over head for the welfare
Current ratio: it measures the ability of the firm to meet of the society. It will have no future if it fails to make
its current liability, current asset converted into cash in the sufficient profit. A manager should continuously evaluate the
operating cycle of the firm and provide the fund needed to pay efficiency of its company in terms of profit. Profitability ratios
current liabilities, the higher current ratio, the greater short are calculated to measures the operating efficiency of the firm
term solvency. However, in interpreting current ratio the (Selah and Ramie, 2006).
composition of asset must not be over looked. A firm with a
high proportion of current asset in the form of cash and E. Empirical Evidences
account receivable is more liquid than one with high Abdu’s Sam ad (2004) in this paper examines the
proportion of current asset in the form of inventories even comparative performance of Bahrain’s interest-free Islamic
though both firms have the same current ratio (Brigham, banks and the interest based conventional commercial banks
2004). during the post Gulf War period 1991-2001.Using nine
financial ratios in measuring the performance with respect to
 Efficiency or Asset Management Ratio (a)profitability,(b)liquidity risk ,and (c)credit risk, and
The objective of this ratio is to indicate various aspects applying student’s t-test to these financial ratios, the paper
of operational efficiency, attention is focused here. The concludes that there exists a significance difference in
efficiency of asset utilization is measured by the profitability profitability and liquidity performance between Islamic banks
ratio. There are some ratios here. Fixed asset turnover ratio: it and conventional banks. Ahmad and Hassan (2007) analyzed
indicate the extent to which firm is using existing property, the asset quality, capital ratios, operational ratios such as net
plant asset and equipment to generate revenue. Higher rate of profit margin, net interest income, income to asset ratio , non
this ratio are supposed to effect better than average fixed asset interest income to asset ratio and liquidity ratios for seven
management and lower ratio represent poor management. years From 1994-2001. Islam banks on an average were the
Total asset turnover ratio: it measures the turnover of all the preeminent performer in terms of lowest non- performing to
firms asset it indicate how effectively firm use its total gross loan ratio, capital funds to total asset ratio, capital funds
resource to generate sale and is a summery measure influenced to ne t loans, capital funds to short -term loan ratio, capital
by each of the asset management ratio. High rate of this ratio funds to liability ratios, non-interest expense to average asset
indicate a successful asset management, and low ratio to ratio and most of the liquidity ratios.
indicate unsuccessful asset management (Gokulsinha, 2010).
Selah and Ramie (2006) In order to evaluate the Islamic
 Leverage or Debt Management Ratio banks’ performance in Jordon examine and analyze the
The purpose of this ratio is to indicate the firm’s ability experience with Islamic banking for the first and second
to meet both principal and interest payment on the long term Islamic bank, Jordan Islamic bank for France and investment
obligation as opposed to short term liquidity ratio; these (JIBFI),and Islamic international Arab Bank (IIAB) in Jordon.
measures stress the long term financial and operating structure The study also highlights the domestic as well as global
of the firm. The numerator of this ratio consist all liability; challenges being faced by this sector. Conducting profit
short term as well as long term and denominator consist of net maximization, capital structure, and liquidity tests as
worth plus preference capital. In general the lower debt equity performance evaluation methodology, the paper finds the
ratio is needed mean that the higher the degree of protection efficiency and ability of both banks have increased and both
enjoyed by creditors. Debt ratio: it measures the extent to banks have expanded their investment and activities. Finally,
which borrowed fund support the firm’s asset. Time interest the study concludes that Islamic banks have high growth in the
earned ratio: it is supposed to measure how easily the firm can credit facilities and in profitability.
meet its interest obligation. Many times the interest payment is
covered by funds that are normally available to pay interest
expenses. The lower ratios of time interest indicate the more a
firm uses debt than its typical competitors (Hempel, G., &
Simonson, 1999).

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III. RESEARCH METHODOLOGY
Ratio
A. Research Design
The research design employed in this study was
descriptive and mixed research approach i.e. both qualitative 2015
and quantitative research approaches were used.
2016
B. Type and Source of Data 2017
The required data to achieve the objective of the study
was secondary data. The Secondary data were obtained from 2018
audited annual reports of Commercial bank of Ethiopia.

C. Method of Data Collection

The type of data to achieve the objective of the study
was secondary data. The data were collected from Secondary Fig 1:- Liquidity Ratio
source from the annual financial statement of Commercial
bank of Ethiopia. Basically the reality and validity of good As shown in the above graph in 2015, 2016, 2017 and
research based on quality data that would be collected. 2018 the bank has birr 1.07, 1.06, 1.30 and 1.28 in current
Therefore to get relevant data audited financial statements assets available to cover every one birr in current liability
were used and all necessary precaution was taken, so as to respectively. Since the banks current ratio are moderate the
ensure genuine (true) information is obtained. current asset of the bank are sufficient to cover its current
liability.
D. Method of Data Analysis and Presentation
After secondary data were collected, the data were  Asset Management Ratio
analyzed and presented using different tables, diagrams and This ratio is employed to evaluate the efficiency with
percentages which used to compare the trends in different which the firm managed and utilizes its asset. The efficiency
years. The bank’s financial performance was evaluated using of the bank to generate adequate amount of income from its
ratio analysis through graphical and tabular data analysis asset can be evaluated using fixed asset turnover ratio and
technique. total asset turnover ratio.

IV. RESULTS AND DISCUSSION  Fixed Asset Turnover Ratio

Fixed Asset Turnover Ratio shows bank’s ability in
A. Introduction using its existing property, plant asset and equipment to
As explained in chapter one the general objective of this generate income. In 2015 the bank uses its fixed asset of 0.982
paper was to assess the financial performance of Commercial times its total revenue and 0.485, 0.467 and 0.510 times of
bank of Ethiopia. The audited financial statement of total revenue of 2016, 2017 and 2018 respectively. The trend
commercial bank of Ethiopia was analyzed for the past four efficiency of the bank for the last four years can show in the
consecutive years to evaluate the performance of the bank and following graph.
results are discussed in the following sections.
Ratio
B. Ratio Analysis
Ratio analysis is one of the major tools used in
interpretation, analysis and evaluation of financial statement
data. In this section the various type of value ratio analysis is
2015
used to interpret and evaluates the financial performance in the
last four years. 2016

 Liquidity Ratio 2017

It measures the ability of the firm to meet its current 2018
obligation. The important liquidity ratio is current and quick
ratio. Since the bank is no inventory in the financial statement
the researchers use ratio to evaluate the performance of the
bank. In the past four years the bank current ratio was
fluctuated. As a result the bank has the ability to cover the
claim of short term creditors. Graphically it can be shown: Fig 2:- Fixed Asset Turnover Ratios

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Volume 4, Issue 12, December – 2019 International Journal of Innovative Science and Research Technology
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As shown in the graph the fixed asset turns over ratio creditors may require decreasing the rate of return (interest
were fluctuated in the past four years, this implies that the rate) for taking lower risk in the last two years. In general the
bank’s performance in using its fixed asset intensively was lower debt equity ratio is needed meant the higher the degree
decreases from 2015 to2017 and increase in 2018. of protection enjoyed by creditors.

 Total Asset Turnover Ratio  Time Interest Earned Ratio

Total asset turnover ratio: indicates how effectively the In years 2017 to 2018 the bank has an ability to meet its
bank uses its total asset to generate revenue. annual interest charge by increasing high margin of safety, but
from2015 to 2016 the bank was in decreasing margin of
safety.
Ratio

Ratio
2015
2016
2015
2017
2016
2018
2017
2018

Fig 3:- Total Asset Turnover Ratio

As indicate in the above graph the total asset turnover

ratio of the bank has been decreased from 2015 to 2017and Fig 5:- Time Interest Earned Ratio
increase in 2018. This is clear indication of the banks
efficiency in using its total asset in relative to generate Generally in 2017 and 2018 of margin of safety was
revenue and profitability. good relative to 2015 and 2016 margin of safety. In the last
two years the bank was able to generate operating income to
 Leverage (Debt Management) Ratio meet its obligation, but in 2015 and 2016 the bank was face
The purpose of leverage ratio is to indicate the firm’s some difficulty in rising additional borrowing.
ability to meet both principal and interest payment on the long
term obligation. For this analysis purpose debt ratio and time C. Profitability Ratio
interest earned ratio were used. These ratios are used to measure the management
effectiveness to generate adequate amount of income from
operations. For this analysis purpose the basic earning power
Ratio ratio and return on asset were used. Basic earning power ratio:
this ratio indicates the ability of the bank asset to generate
income before tax and leverage.
2015
 Return on asset
2016 As shown in the following table Return on asset ratio
2017 (ROA): measures the return on total asset after interest and
tax.
2018
Items 2015 2016 2017 2018
Net income 9286.8 9986.4 11622 14812.2

Total asset 305,075 384,693 485,700 565,500

Fig 4:- Leverage Ratio
Ratio 0.030 0.026 0.024 0.026
As indicated in the above graph the debt ratio for 2015 to Table 1:- Return on asset
2016 is relatively increasing and decreasing in 2017 to 2018. It Source: Annual report
implies that the bank has good capital structure and the firm
assets are provided by owner than creditor. As a result

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The bank’s return on asset is slightly decrease for the RECOMMENDATION
first three consecutive (2015-2017) years and slightly increase
for the last (2018) year. This implies that the bank should find The findings of this study revealed that the debt
out strategies to increase its asset utilization. management of Commercial bank of Ethiopia signifies a lower
ratio for the last two years. A low level of debt introduces
 Return on Equity inflexibility in the bank’s operation due to the increasing
Return on equity (ROE) ratio: this ratio is the most interference and pressure by owners. Hence, the bank shall try
important accounting ratio which measures the return on to increase debt ratio to a reasonable extent and raise
common equity. additional finance to expand the business as well as increase
profitability since debt is known as a cheapest source of fund
Items(in million 2015 2016 2017 2018 for business entities than other sources.
birr)
Net income 9286.8 9986.4 11622 14812.2 REFERENCES
Total equity 13,321 16,105 40,000 60,809
[1]. Abdu’s, S. (2004). Bahrain's Commercial Bank
Ratio 0.697 0.620 0.291 0.244 Performances during 1994- 2001.
Table 2:- Return on equity [2]. Ahmad, A. U. F., & Hassan, M. K. (2007). Regulation
Source: Annual Report and Performance of Islamic Banking in Bangladesh,
Thunderbird International Business Review.
The bank’s return on equity was decrease from 2015- [3]. David evince (2003), financial analysis and decision
2018 and the ratio was 0.697, 0.620, 0.291, and 0.244 making. Mcgraw hill ; new York
respectively. It indicates the bank has inefficiency in using its [4]. E.F Brigham, collisc. G. (2005). intermediate financial
total equity in relative to generate net income. management 5th edition)
[5]. Foster G (1978). Financial statement analysis practice;
V. CONCLUSION Hall cliff new jerrsy.
[6]. Git man, L.J (2004). Principles of Managerial finance
Although current asset covered current liability, the 10th editions’ Pearson education.
bank’s ability to meet current liability by using current asset [7]. Gokulsinha (2010). Financial statement analysis.
was fluctuated in the past four years. The ratios were slightly [8]. Hassan, Z. (2005a). “Evaluation of Islamic banking
moderate and enable the bank paying its short term obligation. performance: On the current use of econometric
The fixed asset turnover ratio of Commercial bank of Ethiopia models”, Munich Personal Re PEc Archive Paper
throughout 2015- 2017 was slightly decreased but in 2018 it No.6461, Posted 27.
was improved. This implies that the bank has good ability in [9]. Hempel, G. H., & Simonson, D.G. (1999).”Bank
using its property, plant asset and equipment to generate Management: Text and Cases”, Wiley and Sons, 5th
revenue. Also total asset turnover ratio of commercial bank of edition.
Ethiopia was decreased from 2015 to 2017 but it was [10]. Horngren SE.,(2001). introduction to financial
improved in 2018. This indicates that the bank is effectively accounting ,8th edition
using its total resource to generate revenue. Regarding of the [11]. Kosmidou, K. (2008). The determinants of banks‟ profit
ability of bank to meet its annual interest charge Commercial in Greece during the Period of EU financial integration”,
bank of Ethiopia time interest earned ratio show high margin Managerial Finance, 34 (3). Lebanon”, International
of safety in 2017 and 2018, but in 2016 it was decreased. The Journal of Business, 9(3), 259-28.
bank’s basic earning power ratios have been increased from [12]. Peters, D., Raad, E. and Sinkey F. Joseph (2004). The
2015 to 2017 but it shows a slight decrease in 2018. Generally performance of banks in postwar
the financial performance of the bank for the last four years [13]. Prasonna Chandra,(2001). Investment analysis and
was reasonably good when it is evaluated using audited portfolio management .
financial statements. [14]. Saleh, A. S. and Z. Ramie (2006). “Islamic Banking
Performance in the Middle East: A Case Study of
Jordan.” Working Paper 06-21, Department of
Economics, University of Wollongong.
[15]. Www. internet .com /www.cbe.et.annual report .com

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APPENDICES

1. The Overall income analysis of commercial bank of Ethiopia annual report of the income analysis:

Items Amount in Million Birr Percentage

2015 2016 2017 2018 2015/16 2016/17 2017/18 2015/16 2016/17 2017/18

Interest 16,769 21,444 23,467 27,771 4,675 2,023 4,304 27.9% 9.4% 18.3%
income
Service charge 2,759 3,033 2,085 3,389 274 (948) 1304 9.9%% (31.3%) 62.5%

Gain on forex 1,962 1,360 2,303 2,089 (602) 943 (214) (30.7%) 69.3% (9.3%)
currency
transactions
Other income 2,743 2,407 2,168 3,253 (336) (239) 1085 (12.2%) (9.9%) 50%
Total 24,233 28,244 30,023 36,502 4,011 1,779 6,479 16.6% 6.3% 21.6%

2. Expense analysis that are interest expense, salary and benefit expense, other expense and doubtful debts are list below;

Items Amount in Million Birr Percentage (%)

2015 2016 2017 2018 2015/16 2016/17 2017/18 2015/16 2016/17 2017/18
Interest 4,884 6,422 6,642 6,785 (1538) (220) (143) (31.5%) (3.4%) (2.2%)
expense
Salary exp 3,337 4,418 3,325 4,085 (1081) 1093 (760) 24.7% (14%) (22.9%)

Other expense 534 760 686 945 (226) 74 (259) (42.3%) 9.7% (37.8%)

Total 8,755 11,600 10,653 11,815 (2845) 947 (1,162) (32.5%) 8.16% (10.91%)

3. Deposit analysis of Commercial bank of Ethiopia such as demand deposit, saving deposit and fixed deposit are collected from of
annual report of bank are;

Items Amount in Million Birr Percentage

2015 2016 2017 2018 2015/16 2016/17 2017/18 2015/16 2016/17 2017/18

Demand 120,183 133,820 135,207 148,252 13,637 1,387 13,045 11.3% 1.04% 9.6%
deposit
Saving 108,788 142,626 177,615 198,289 33,838 34,989 20,674 31.1% 24.5% 11.6%
deposit
Fixed time 13,527 12,160 10,246 9,912 (1,367) (1,914) (334) (10.1%) (15.7%) (3.3%)
deposit

Total 242,498 288,606 323,068 356,453 46,108 34,462 33,385 19% 11.9% 10.3%
deposit

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4. Current asset, current liability, total equity, revenue, fixed asset and total asset of Annual report of Commercial bank of Ethiopia
are show bellow; ( in million birr)

Items 2015 2016 2017 2018

Current asset 280,387 326,442 417,375 492,537
Current liability 261,434 308,837 319,837 385,872

Total equity 13,321 16,105 40,000 60,809

Revenue 24,233 28,244 31,900 37,240
Fixed asset 24,688 58,251 68,323 72,963
Total asset 305,075 384,693 485,700 565,500

5. The annual report of Commercial bank of Ethiopia EBIT, Net income and total debts are show below;
( in million birr)

Items 2015 2016 2017 2018

EBIT 20,362 23,066 26,012 31,472
Net income/loss 9286.8 9986.4 11622 14812.2
Total debt 291,754 368,588 445,700 504,691
Source: Annual Report of the Bank (2015-2018)

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