FINANCIAL STATEMENT ANALYSIS OF

STATE BANK OF INDIA

UNIVERSITY OF MUMBAI

LALA LAJPATRAI COLLEGE OF COMMERCE AND

ECONOMICS MAHALAXMI MUMBAI – 34

SUBMITED BY

MS. GAYATRI CHILIVERI

ROLL NO. 1617421

TYBAF – SEMESTER VI

PROJECT GUIDE

Prof.MOHAMMED SIDDIQUESHAIKH

YEAR OF SUBMISSION

2018-2019

1
 CERTIFICATE

I, Prof. Mohammed Siddique Shaikh, hereby certify that Ms. Gayatri Chiliveri
from TYBAF of Lala Lajpatrai College of Commerce And Economics completed this
Research

Project on banking titled “FINANCIAL STATEMENT ANALYSIS OF STATE

BANK OF INDIA” in semester VI of the academic year 2018-2019.

The information submitted here is true and original to best of my knowledge.

____________________ ___________________

Signature of external examiner Signature of internal examiner

____________________ ___________________

Signature of project guideSignature of Principal

Date ofSubmission:

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 DECLARATION

I, Ms. Gayatri Chilivei from TYBAF ofLala Lajpatrai College Of Commerce And
Economics, hereby declare that I have completed this Research Project on Banking
titled

“FINANCIAL STATEMENT ANALYSIS OF STATE BANK OF INDIA” in

Semester VI of the academic year 2018-2019.

The information provided by me is true and original to best of my knowledge.

___________________

Date:Student’s Signature

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 ACKNOELEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbaifor giving me chance to do

this project.

I would like to thank my Principal, Mrs. Neelam Arora for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Coordinator Dr.Minum Saksena for her moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide

Prof. Mohammad Siddique Shaikhwhose guidance and care made the project
successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.

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 EXCUTIVE SUMMARY

The project of “FINANCIAL STATEMENT ANALYSIS OF STATE BANK

OF INDIA” of state bank of India is based on all financial information about
the bank. The objectives of bank & method of collecting data is clearly define
by this project report on bank.

The project includes the objectives- to study the annual report of financial
position of the company, to understand the day-to-day work carry out by the
organization, to observe the cash inflow & outflow, to check the profitability
of bank to study the policy of the bank etc.

The project indicates the primary method of collection as bank’s annual report
of previous year, different document prepared by the bank and from various
reference books, from Indian statistical year book, from various websites etc .

In short this project report is the in –depth study of all kind of “financial
Statements” of the bank which reflects the past, current & future financial
position of the bank.

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 INDEX

NO. TOPICS NAME PAGE NO.

1 Chapter 1. Introduction 9-14

1.1 Financial Statement Analysis

1.2 The Balance Sheet

1.3 The Income Statement

1.4 The Statement of cash flows

1.5 Users of financial statement analysis

1.6 Methods of financial statement analysis

1.7 Problems with financial statement analysis

2 Chapter 2. Review of Literature 15

3 Chapter 3. Research Methodology 16-18

3.1 Objectives of study

3.2 Limitations of study

3.3 Data collection

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4 Chapter 4. Financial Ratio Analysis

4.1 History

4.2 Liquidity ratio

4.3 Profitability ratio

4.4 Activity ratio

4.5 Leverage ratio

4.6 Purpose of financial ratios

5 Chapter 5. Types of ratios 23-42

5.1 Financial ratios

5.2 Quick ratio

5.2 Retention rate

5.4 Return on Assets ratio- ROA

5.5 Return on capital employed

5.6 Return on equity ratio

5.7 EBITDA

5.8 EBITDA margin

5.9 Interest coverage ratio

5.10 Net profit Margin

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6 chapter 6. STATE BANK OF INDIA 43-51

6.1 Evolution

6.2 Establishment

6.2 Business

6.3 Major change in the conditions

6.4 Presidency banks of Bengal

6.5 Imperial bank

6.6 First five plan

7 Chapter 7. Data Analysis & Interpretation of 52-59

Financial Statements

7.1 Data Analysis

7.2 Interpretation

8 8.1 Conclusion 60

8.2 Bibliography 61

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 CHAPTER 1: INTRODUCTION

Financial Statement Analysis of SBI

Financial statement analysis is the process of reviewing and analyzing a company’s

financial statements to make better economic decisions. These statements include the
income statement, balance sheet, statement of cash flows, and a statement of changes
in equity. Financial statement analysis is a method or process involving specific
techniques for evaluating risks, performance, financial health, and future prospectus
of an organization.

It is used by verity of stakeholder, such as credit and equity investor, the government,
the public, and decisions make within the organization. These stakeholder have
different interest and apply a verity of different techniques to meet their needs. For
example, equity investor are interested in the long- term earnings power of the
organization and perhaps the sustainability and growth of dividend payments Creditor
want to ensure the interest and principal is paid on the securities (e.g. bonds ) when
due.

Common methods of financial statements analysis fundamentals analysis, DuPont

analysis, horizontal and vertical analysis and the use of financial ratios. Historical
information combined with a series of assumptions and adjustment to the financial
information may be used to project future performance. Chartered Financial Analysis
designation is available for professional financial analysts.

Financial Statement Analysis is a method which is use in order to gauge its

past, present or projected future performance. This process of reviewing the financial
statements allows for better economic decision making. Globally, publically listed
companies are required by law to file their financial statements with the relevant
authorities. For example, publicly listed firms in America are required to submit their
financial statements to the Securities and Exchange Commission (SEC). Firms are
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also obligated to provide their financial statements in the annual report that they share
with their stakeholders. As financial statements are prepared in order to meet
requirements, the second step in the process is to analyse them effectively so that
future profitability and cash flows can be forecasted.

Therefore, the main purpose of financial statement analysis is to utilize information

about the past performance of the company in order to predict how it will fare in the
future. Another important purpose of the analysis of financial statements is to identify
potential problem areas and troubleshoot those.

The main type of financial statements are the balance sheet, the income statement and
the statement of cash flows. These accounting reports are analyzed in order to aid
economic decision-making of a firm and also to predict profitability and cash flows.

1. The Balance Sheet

The balance sheet shows the current financial position of the firm, at a given single
point in time. It is also called the statement of financial position. The structure of the
balance sheet is laid out such that on one side assets of the firm are listed, while on
the other side liabilities and shareholder’s equity is shown. The two sides balance
sheet must balance as follows:

Assets= Liabilities + Shareholder’s Equity

2. The Income Statement

The purpose of an income statement is to report the revenues and expenditures of a

firm over a specific period of time. It was previously also called a profit and loss
account. The general structure of the income statement with major components is as
follows:

Sales revenue

Less:Cost of goods sold (COGS)

Gross Profit

Less: Selling, general and administrative costs (SG&A)

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Less: Research and development (R&D)

= Earnings before Interest, Taxes, Depreciation and Amortization

(EBITDA)

Less: Depreciation and amortization

= Earnings before interest and taxes (EBIT)

Less: Interest Expenses

= Earnings before taxes (EBT)

Less: Taxes

= Net Income

The net income on the income statement, if positive, shows that the company has
made a profit. If the net income is negative, it means the company incurred a loss.
Earnings per share can be derived from knowing the total number of shares
outstanding of the company.

Earnings per Share = Net Income / Shares Outstanding

3. The Statement Of Cash Flows

The statement of cash flows shows explicitly the sources of the firm’s cash
and where the cash is utilized. It is essentially a statement whereby the net income is
adjusted for non-cash expenses and any changes to the net working capital. It also
reflects changes in cash coming from, or being used by, investing and financing
activities of the firm. The structure and main components of the cash flow statement
are as follows.

Cashfrom operating activities=Net income + Depreciation +/- Changes in net

working capital

Cash from financing activities= New debt + New shares – Dividends – Shares
repurchased

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Cash from investment activities = Capitalexpenditure – Proceeds from sales of
long-term assets.

All three of the above determine the bottom line: changes in cash flows.

Financial statement analysis involves gaining an understanding of an organization’s

financial situation by reviewing its financial statements. This review involves
identifying the following items for a company’s financial statements over a series of
reporting periods:

 Trends. Create trend line for key items in the financial statements over
multiple time periods, to see how the company is performing. Typical trend
lines are for revenues, the gross margin, net profits, cash, accounts receivable,
and debt.
 Proportion analysis. An array of ratios are available for discerning the
relationship between the size of various accounts in the financial statements.
For example, one can calculate a company’s quick ratio to estimate its ability
to pay its immediate liabilities, or its debt to equity ratio to see if it has taken
on too much debt. These analyses are frequently between the revenues and
expenses listed on the income statement and the assets, liabilities, and equity
accounts listed on balance sheet.

Financial statement analysis is an exceptionally powerful tool for a verity of users

of financial statements, each having different objectives in learning about the
financial circumstances of the entity.

Users of Financial StatementAnalysis

There are a number of users of financial statement analysis. They are:

 Creditors. Anyone who has lent funds to a company is interested in its

ability to pay back the bebt, and so will focus on various cash flow
measures.
 Investors. Both current and prospective investors examine financial
statements to learn about a company’s ability continue issuing dividends,

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 or to generate cash flow, or to continue growing at its historical rate
(depending upon their investment philosophies).
 Management. The company controller prepares an ongoing analysis of
company’s financial results, particularly in relation to a number of
operational metrics that are not seen by outside entities (such as the cost
per delivery, cost per distribution channel, profitby product, and so forth).
 Regulatory authorities. If a company is publicly held, its financial
statements are examined by the Securities and Exchange Commission (if
the company files inthe United States) to see if its statements conform to
the various accounting standards and rules of the SEC.(Securities and
Exchange Commission)

Methods of Financial Statement Analysis

There are two key methods for analyzing financial statements. The first
method is the use of horizontal and vertical analysis. Horizontal analysis is
the comparison of financial information over a series of reporting periods,
while vertical analysis is the proportional analysis of a financial statement,
where each line item on a financial statement is listed as a percentage of
another item on an income statement is stated as a percentage of gross
sales, while every line item on a balance sheet is stated as a percentage of
total assets. Thus, horizontal analysis is the review of the proportion of
account to each other within a single period.
The second method for analyzing financial statements is the use of many
kinds of ratios. Ratios are used to calculate the relative size of one number
in relation to another. After s ratio is calculated, you can then compare it to
the same ratio calculated for a prior period, or that is based on an industry
average, to see if the company is performing in accordance with
expectations, while a small number will flag potential problems that will
attract the attention of the reviewer. There are several general categories of
ratios, each designed to examine a different aspect of a company’s
performance.

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 Problems with Financial Statements Analysis

While financial statement is an excellent tool, there are several issues to be

aware of that can interfere with your interpretation of the analysis results.
These issues are:
 Comparability between periods. The company preparing the financial
statements may have changed the accounts in which it stores financial
information, so that results may differ from period to period. For example,
an expense may appear in the cost of goods sold in one period, and in
administrative expenses in another period.
 Comparability between companies. An analyst frequently compares the
financial ratios of different companies in order to see how they match up
against each other. However, each company may aggregate financial
information differently, so that the results of their ratios at not really
comparable. This can lead an analyst to draw incorrect conclusions about
the results of a company in comparison to its competitors.
 Operational information. Financial analysis only reviews a company’s
financial information, not its operational information, so you cannot see a
variety of key indicators of future performance, such as the size of the
order backlog, or changes in warranty claims. Thus, financial analysis only
presents part of the total picture.

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 CHAPTER 2. REVIRW OF LIERATURE

1. Manish Mittal and ArunnaDhademade(2005): They found that higher

profitability is the only major parameter for evaluating banking sector
performance from the shareholders point ofview. Theyfound that public
sectorbanks are less profitable than private sector banks. Foreign banks top
the list in terms of net profitability. Private sector banks earn higher non-
interest income than public sector banks, because these banks offer more
and more fee based services to business houses orcorporate sector. Thus
there is urgent need for public sector banks to provide such services to stand
in competition with private sector banks.
2. MedhatTarawneh (2006): Financial performance is a dependent variable and
measured by Return on Assets (ROA) and the intent income size. The
independent variables are the size ofbanks as measured by total assets of
banks, assets management measured by asset utilizationratio (Operating
income divided by total assets) operational efficiency measured by the
operatingefficiency ratio (total operating expenses divided by net income)
3. Ravinder Kaur (May2012): A comparative study of SBI and ICICI Bank, the
author haswritten an International Multidisciplinary Research Journal. Due to
globalization, banking sectorhas developed a lot. The banking sector in India
has very large network. One of the popularbanks is the State Bank of India.
The SBI has over 16,000 branches over a wide range ofbanking. The main
objective of study is to examine the financial performance of SBI and ICICI
Bank. SBI is a public sector bank and ICICI bank is a private sector bank .Ratio
analysis wasapplied to analyze and to compare the trends in banking business
and financial performance.
4. AlpeshGajera (2015): In his research article an financial performance
evaluation of privateand public sector banks found that there in significance
difference in the financial performanceof these banks and private sector
banks are performed better than public sector banks in respectof capital
adequacy ratio and financial performance,

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 CHAPTER 3. RESEARCH METHODOLOGY

OBJECTIVES OF STUDY

 To study the annual report or financial position of the company.

 To understand the day to day work carry out the organization.

 To study bank history in brief.

 To study the current existing position of SBI banks whole filed.

 To observe the cash inflow and outflow.

 To check the profitability to bank.

 To analysis how the bank is managing its current assets & current
liabilities.

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LIMITATIONS OF STUDY

There is no activity that can be completed without any limitation. The main
limitation faced during the preparation of this project report on “Financial
Statement Analysis Of State Bank of India” is as follows:-

 Time available for the completion of the project is very short, hence
much information could not be undertaken.

 The information collected through secondary data. Some of the

information might be wrong.

 The calculation & computation are based on valuable information

given by the bank.

 The report is based on the analysis of the analysis of the last two
years data, which may not be sufficient in some cases.

 The analysis made is as per my limited understanding for this

concerned subject.

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DATA COLLECTION

Preparing the project report is a research analysis, it involves the process of collecting
data analyzing data & reporting data for absolute results.

For the preparationof project report on “Financial Statement Analysis of SBI”.

This project report based on secondary data.

Secondary data:-

Secondary data is the data, which is collected from published sources. I have
collected data from various sources such as bank’s annual report of previous
year, different document prepared by the bank and from various reference
banks also.

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 CHAPTER 4. FINANCIAL RATIO ANALYSIS

HISTORY

Benjamin Graham and David Dodd fit published their influential book "Security
Analysis" in 1934. A central premise of their book is that the market's pricing
mechanism for financial securities such as stocks and bonds is based upon faulty and
irrational analytical process only occasionally coinciding with the intrinsic
value around which the price tends to fluctuate.Investor Warren Buffett is a well-
known supporter of Graham and Dodd's philosophy.

The Graham and Dodd approach is referred to as Fundamental analysis and includes:
1) Economic analysis; 2) Industry analysis; and 3) Company analysis. The latter is the
primary realm of financial statement analysis. On the basis of these three analyses the
intrinsic value of the security is determined performed by many market participants.
This results in the market price of a security.

FINANCIAL RATIO ANALYSIS

A financial ratio or accounting ratio is a relative magnitude of two selected numerical

values taken from an enterprise’s financial statements. Often used in accounting, there
are many standard ratios used to try to evaluate the overall financial condition of a
corporation or other organization. Financial ratios may be used by managers within a
firm, by current and potential shareholders (owners) of a firm, and by a firm’s
creditors. Financial analysts use financial ratios to compare the strengths and
weaknesses in various companies. If shares in a company are traded in a financial
market, the market price of the shares is used in certain financial ratios.

Ratios can be expressed as a decimal value, such as 0.10, or given as an

equivalent percent value, such as 10%. Some ratios are usually quoted as percentages,
especially ratios that are usually or always less than 1, such as earnings yield, while
others are usually quoted as decimal numbers, especially ratios that are usually more
than 1, such as P/E ratio; these latter are also called multiples. Given any ratio, one
can take its reciprocal; if the ratio was above 1, the reciprocal will be below 1, and
conversely. The reciprocal expresses the same information, but may be more
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understandable: for instance, the earnings yield can be compared with bond yields,
while a P/E ratio cannot be: for example, a P/E ratio of 20 corresponds to an earnings
yield of 5%.

Financial ratios are very powerful tools to perform some quick analysis of financial
statements. There are four main categories of ratios: liquidity ratios, profitability
ratios, activity ratios and leverage ratios. These are typically analyzed over time and
across competitor in an industry.

 Liquidity ratios: Are used to determine how quickly a company can turn its
assets into cash if it experiences financial difficulties or bankruptcy. It essentially
is a measure of a company's ability to remain in business. A few common
liquidity ratios are the current ratio and the liquidity index. The current ratio is
current assets/current liabilities and measures how much liquidity is available to
pay for liabilities. The liquidity index shows how quickly a company can turn
assets into cash and is calculated by: (Trade receivables x Days to liquidate) +
(Inventory x Days to liquidate)/Trade Receivables + Inventory.

 Profitability ratios: Are ratios that demonstrate how profitable a company is. A
few popular profitability ratios are the breakeven point and gross profit ratio. The
breakeven point calculates how much cash a company must generate to break
even with their start up costs. The gross profit ratio is equal to (revenue - the cost
of goods sold)/revenue. This ratio shows a quick snapshot of expected revenue.

 Activity ratios: Are meant to show how well management is managing the
company's resources. Two common activity ratios are accounts payable turnover
and accounts receivable turnover. These ratios demonstrate how long it takes for a
company to pay off its accounts payable and how long it takes for a company to
receive payments, respectively.

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 Leverage ratios: Depict how much a company relies upon its debt to fund
operations. A very common leverage ratio used for financial statement analysis is
the debt-to-equity ratio. This ratio shows the extent to which management is
willing to use debt in order to fund operations. This ratio is calculated as: (Long-
term debt + Short-term debt + Leases)/ Equity.

DuPont analysis uses several financial ratios that multiplied together equal return on
equity, a measure of how much income the firm earns divided by the amount of funds
invested (equity).

A Dividend discount model (DDM) may also be used to value a

company's stock price based on the theory that its stock is worth the sum of all of its
future dividend payments, discounted back to their present value. In other words, it is
used to value stocks based on the net present value of the future dividends.

Financial statement analyses are typically performed in spreadsheet software and

summarized in a variety of formats.

PURPOSE OF FINANCIAL RATIOS

Financial ratios quantify many aspects of a business and are an integral part of the
financial statement analysis. Financial ratios are categorized according to financial
aspect of the business which the ratio measures. Liquidity ratios measure the
availability of cash to pay debt. Activity ratios measures how quickly a firm converts
non-cash assets to cash assets. Debt ratios measure the firm’s ability to repay long-
term debt. Profitability ratios measure the firm’s use of its assets and control of its
expenses to generate an acceptable rate of return. Market ratios measure investor
response to owning a company’s stock and also the cost of issuing stock. These are
concerned with the return on investment for shareholders, and with the relationship
between return and the value of an investment in company’s shares.

Financial ratios allow for comparisons

 between companies
 between industries
 between different time periods for one company
 between a single company and its industry average
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Ratios generally are not useful unless they are benchmarked against something else,
like past performance or another company. Thus, the ratios of firm in different
industries, which face different risks, capital requirements, and competition are
usually hard to compare.

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 CHAPTER 5. TYPES OF RATIO

FINANCIAL RATIOS

Financial ratios are mathematical comparisons of financial statement accounts or

categories. These relationships between the financial statement accounts help
investor, creditor, and internal company management understand how well a business
is performing and of areas where improvement is needed.

Financial ratios are the most common and widespread tools used to analyze a
business' financial standing. Ratios are easy to understand and simple to compute.
They can also be used to compare different companies in different industries. Since a
ratio is simply a mathematically comparison based on proportions, big and small
companies can make use ratios to compare their financial information. In a sense,
financial ratios don't take into consideration the size of a company or the industry.
Ratios are just a raw computation of financial position and performance.

Ratios allow us to compare companies across industries, big and small, to identify
their strengths and weaknesses. Financial ratios are often divided up into seven main
categories: liquidity, solvency, efficiency, profitability, market prospect, investment
leverage, and coverage.

QUICK RATIO

The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a
company to pay its current liabilities when they come due with only quick assets.
Quick assets are current assets that can be converted to cash within 90 days or in the
short-term. Cash, cash equivalents, short-term investments or marketable securities,
and current accounts receivable are considered quick assets.
Short-term investments or marketable securities include trading securities and
available for sale securities that can easily be converted into cash within the next 90
days. Marketable securities are traded on an open market with a known price and
readily available buy. Any stock on the New York Stock Exchange would be
considered a marketable security because they can easily be sold to any investor when
the market is open.

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The quick ratio is often called the acid test ratio in reference to the historical use of
acid to test metals for gold by the early mine. If the metal passed the acid test, it was
pure gold. If metal failed the acid test by corroding from the acid, it was a base metal
and of no value.

The acid test of finance shows how well a company can quickly convert its assets into
cash in order to pay off its current liabilities. It also shows the level of quick assets to
current liabilities.

FORMULA

The quick ratio is calculated by adding cash, cash equivalents, short-term investments,
and current receivables together then dividing them by current liabilities.

QUICK RATIO =
Cash + Cash equivalents + Short term Investments + Current Receivable
Current Liabilities
Sometimes company financial statements don't give a breakdown of quick assets on
the balance sheet. In this case, you can still calculate the quick ratio even if some of
the quick asset totals are unknown. Simply subtract inventory and any current prepaid
assets from the current asset total for the numerator. Here is an example.

Quick ratio = Total current assets - Inventory-prepaid expenses

Current Liabilities

ANALYSIS

The acid test ratio measures the liquidity of a company by showing its ability to pay
off its current liabilities with quick assets. If a firm has enough quick assets to cover
its total current liabilities, the firm will be able to pay off its obligations without
having to sell off any long-term or capital assets.

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 Since most businesses use their long-term assets to generate revenues, selling off
these capital assets will not only hurt the company it will also show investor that
current operations aren't making enough profits to pay off current liabilities.

Higher quick ratios are more favourable for companies because it shows there are
more quick assets than current liabilities. A company with a quick ratio of 1 indicates
that quick assets equal current assets. This also shows that the company could pay off
its current liabilities without selling any long-term assets. An acid ratio of 2 shows
that the company has twice as many quick assets than current liabilities.

Obviously, as the ratio increases so does the liquidity of the company. More assets
will be easily converted into cash if need be. This is a good sign for investor, but an
even better sign to creditor because creditor want to know they will be paid back on
time.

EXAMPLE

Let's assume Carole's Clothing Store is applying for a loan to remodel the storefront.
The bank asks Carole for a detailed balance sheet, so it can compute the quick ratio.
Carole's balance sheet included the following accounts:

 Cash: Rs.10,000
 Accounts Receivable: Rs.5,000
 Inventory: Rs.5,000
 Stock Investments: Rs.1,000
 Prepaid taxes: Rs.500
 Current Liabilities: Rs.15,000
The bank can compute Carole's quick ratio like this.

Quick ratio = Rs. 10000+Rs. 5000+Rs.1000

Rs.15000

As you can see Carole's quick ratio is 1.07. This means that Carole can pay off all of
her current liabilities with quick assets and still have some quick assets left over.
25
RETENTION RATE

The retention rate, sometimes called the plowback ratio, is a financial ratio that
measures the amount of earnings or profits that are added to retained earnings at the
end of the year. In other words, the retention rate is the percentage of profits that are
withheld by the company and not distributed as dividends at the end of the year.

This is an important measurement because it shows how much a company is

reinvesting in its operations. Without a steady reinvestment rate, company growth
would be completely dependent on financing from investor and creditor.

In a sense the retention ratio is the opposite of the dividend payout ratio because it
shows how much money the company chooses to keep in its bank account; whereas,
the dividend payout ratio computes the percentage of profits that a company choose to
distribute to its shareholder. The plowback ratio increases retained earnings while the
dividend payout ratio decreases retained earnings.

FORMULA

The retention rate is calculated by subtracting the dividends distributed during the
period from the net income and dividing the difference by the net income for the year.

Retention Rate = Net Income – Dividends Distributed

Net Income

The numerator of this equation calculates the earnings that were retained during the
period since all the profits that are not distributed as dividends during the period are
kept by the company. You could simplify the formula by rewriting it as earnings
retained during the period divided by net income.

Retention Rate= Retained Earnings

Net Income
26
ANALYSIS

Since companies need to retain some portion of their profits in order to continue to
operate and grow, investor value this ratio to help predict where companies will be in
the future. Apple, for instance, only started paying dividends in the early 2010s. Up
until then, the company retained all of its profits every year.

This is true about most tech companies. They rarely give dividends because they want
to reinvest and continue to grow at a steady rate. The opposite is true about
established companies like GE. GE gives dividends every year to it shareholder.

Higher retention rates are not always considered good for investor because this
usually means the company doesn't give as much dividends. It might mean that the
stock is continually appreciating because of company growth however. This ratio
helps illustrate the difference between a growth stock and an earnings stock.

EXAMPLE

Ted's TV Company earned Rs.100000 of net income during the year and decided to
distribute Rs.20000 of dividends to its shareholder. Here is how Ted would calculate
his plowback ratio.

Retention Rate

80% = Rs.100000 – Rs.20000

Rs.100000
As you can see, Ted's rate of retention is 80 percent. In other words, Ted keeps 80
percent of his profits in the company. Only 20 percent of his profits are distributed to
shareholder. Depending on his industry this could a standard rate or it could be high.

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RETURN ON ASSETS RATIO - ROA

The return on assets ratio, often called the return on total assets, is a profitability ratio
that measures the net income produced by total assets during a period by comparing
net income to the average total assets. In other words, the return on assets ratio or
ROA measures how efficiently a company can manage its assets to produce profits
during a period.

Since company assets' sole purpose is to generate revenues and produce profits, this
ratio helps both management and investor see how well the company can convert its
investments in assets into profits. You can look at ROA as a return on investment for
the company since capital assets are often the biggest investment for most companies.
In this case, the company invests money into capital assets and the return is measured
in profits.

In short, this ratio measures how profitable a company's assets are.

FORMULA

The return on assets ratio formula is calculated by dividing net income by average
total assets.

Return on Assets Ratio= Net income

Average Total Assets

This ratio can also be represented as a product of the profit margin and the total asset
turnover.
Either formula can be used to calculate the return on total assets. When using the fit
formula, average total assets are usually used because asset totals can vary throughout
the year. Simply add the beginning and ending assets together on the balance
sheet and divide by two to calculate the average assets for the year. It might be
obvious, but it is important to mention that average total assets is the historical cost of
the assets on the balance sheet without taking into consideration the accumulated
depreciation.
The net income can be found on the income statement.

28
ANALYSIS

The return on assets ratio measures how effectively a company can earn a return on its
investment in assets. In other words, ROA shows how efficiently a company can
convert the money used to purchase assets into net income or profits.

Since all assets are either funded by equity or debt, some investor try to disregard the
costs of acquiring the assets in the return calculation by adding back interest expense
in the formula.

It only makes sense that a higher ratio is more favourable to investor because it shows
that the company is more effectively managing its assets to produce greater amounts
of net income. A positive ROA ratio usually indicates an upward profit trend as well.
ROA is most useful for comparing companies in the same industry as different
industries use assets differently. For instance, construction companies use large,
expensive equipment while software companies use compute and serve.

EXAMPLE

Charlie's Construction Company is a growing construction business that has a few

contracts to build storefronts in downtown Chicago. Charlie's balance sheet shows
beginning assets of Rs.1000000 and an ending balance of Rs.2000000 of assets.
During the current year, Charlie's company had net income of Rs.20000000. Charlie's
return on assets ratio looks like this.

Return on Assets Ratio

133.33%= Rs.20000000
(Rs.1000000+ Rs.2000000) / 2

As you can see, Charlie's ratio is 1,333.3 percent. In other words, every dollar that
Charlie invested in assets during the year produced Rs.13.3 of net income. Depending
on the economy, this can be a healthy return rate no matter what the investment is.

29
Investor would have to compare Charlie's return with other construction companies in
his industry to get a true understanding of how well Charlie is managing his assets.

RETURN ON CAPITAL EMPLOYED

Return on capital employed or ROCE is a profitability ratio that measures how

efficiently a company can generate profits from its capital employed by comparing net
operating profit to capital employed. In other words, return on capital employed
shows investor how many Rupee in profits each dollar of capital employed generates.

ROCE is a long-term profitability ratio because it shows how effectively assets are
performing while taking into consideration long-term financing. This is why ROCE is
a more useful ratio than return on equity to evaluate the longevity of a company.
This ratio is based on two important calculations: operating profit and capital
employed. Net operating profit is often called EBIT or earnings before interest and
taxes. EBIT is often reported on the income statement because it shows the company
profits generated from operations. EBIT can be calculated by adding interest and
taxes back into net income if need be.

Capital employed is a fairly convoluted term because it can be used to refer to many
different financial ratios. Most often capital employed refer to the total assets of a
company less all current liabilities. This could also be looked at as
stockholder' equity less long-term liabilities. Both equal the same figure.

FORMULA

Return on capital employed formula is calculated by dividing net operating profit or

EBIT by the employed capital.

Return on capital Employed = Net operating Profit

Employed Capital

30
If employed capital is not given in a problem or in the financial statement notes, you
can calculate it by subtracting current liabilities from total assets. In this case the
ROCE formula would look like this:
Return on Capital Employee = Net Operating Profit
Total Assets – Current Liabilities

It isn't uncommon for investor to use averages instead of year-end figures for this
ratio, but it isn't necessary.

ANALYSIS

The return on capital employed ratio shows how much profit each dollar of employed
capital generates. Obviously, a higher ratio would be more favourable because it
means that more Rupees of profits are generated by each dollar of capital employed.

For instance, a return of .2 indicates that for every dollar invested in capital employed,
the company made 20 cents of profits.

Investor are interested in the ratio to see how efficiently a company uses its capital
employed as well as its long-term financing strategies. Companies' returns should
always be high than the rate at which they are borrowing to fund the assets. If
companies borrow at 10 percent and can only achieve a return of 5 percent, they are
losing money.

Just like the return on assets ratio, a company's amount of assets can either hinder or
help them achieve a high return. In other words, a company that has a small dollar
amount of assets but a large amount of profits will have a higher return than a
company with twice as many assets and the same profits.

Example

Scott's Auto Body Shop customizes car for celebrities and movie sets. During the
year, Scott had a net operating profit of Rs.100000. Scott reported Rs.100000 of total
assets and Rs.25000 of current liabilities on his balance sheet for the year.
Accordingly, Scott's return on capital employed would be calculated like this
31
Return on capital employed

1.33 = Rs. 100000

Rs. 100000 – Rs. 25000

As you can see, Scott has a return of 1.33. In other words, every dollar invested in
employed capital, Scott earns Rs.1.33. Scott's return might be so high because he
maintains low assets level.

Companies with large cash reserves usually skew this ratio because cash is included
in the employed capital computation even though it isn't technically employed yet.

RETURN ON EQUITY RATIO

The return on equity ratio or ROE is a profitability ratio that measures the ability of a
firm to generate profits from its shareholder investments in the company. In other
words, the return on equity ratio shows how much profit each dollar of common
stockholder' equity generates.

So a return on 1 means that every dollar of common stockholder' equity generates 1

dollar of net income. This is an important measurement for potential investor because
they want to see how efficiently a company will use their money to generate net
income.

ROE is also indicator of how effective management is at using equity financing to

fund operations and grow the company.

FORMULA

The return on equity ratio formula is calculated by dividing net income by

shareholder's equity.

Return on Equity Ratio = Net Income

Shareholders Equity

32
Most of the time, ROE is computed for common shareholder. In this case, preferred
dividends are not included in the calculation because these profits are not available to
common stockholder. Preferred dividends are then taken out of net income for the
calculation.

Also, average common stockholder's equity is usually used, so an average of

beginning and ending equity is calculated.

ANALYSIS

Return on equity measures how efficiently a firm can use the money from shareholder
to generate profits and grow the company. Unlike other return on investment ratios,
ROE is a profitability ratio from the investor's point of view not the company. In other
words, this ratio calculates how much money is made based on the investor'
investment in the company, not the company's investment in assets or something else.

That being said, investor want to see a high return on equity ratio because this
indicates that the company is using its investor' funds effectively. Higher ratios are
almost always better than lower ratios, but have to be compared to other companies'
ratios in the industry. Since every industry has different levels of investor and income,
ROE can't be used to compare companies outside of their industries very effectively.

Many investor also choose to calculate the return on equity at the beginning of a
period and the end of a period to see the change in return. This helps track a
company's progress and ability to maintain a positive earnings trend.

EXAMPLE

Tammy's Tool Company is a retail store that sells tools to construction companies
across the country. Tammy reported net income of Rs.100000 and issued preferred
dividends of Rs.10000 during the year. Tammy also had 10000Rs.5 par common
shares outstanding during the year. Tammy would calculate her return on common
equity like this:

Return on Equity Ratio= Rs. 100000- Rs. 10000

Rs. 10000 × 5
33
As you can see, after preferred dividends are removed from net income Tammy's
ROE is 1.8. This means that every dollar of common shareholder's equity earned
about Rs.1.80 this year. In other words, shareholder saw a 180 percent return on their
investment. Tammy's ratio is most likely considered high for her industry. This could
indicate that Tammy's is a growing company.
An average of 5 to 10 years of ROE ratios will give investor a better picture of the
growth of this company.

Company growth or a higher ROE doesn't necessarily get passed onto the investor
however. If the company retains these profits, the common shareholder will only
realize this gain by having an appreciated stock.

EBITDA

EBITDA, which stands for earnings before interest, taxes, depreciation, and
amortization, is a financial calculation that measures a company’s profitability before
deductions that are often considered irrelevant in the decision making process. In
other words, it’s the net income of a company with certain expenses like amortization,
depreciation, taxes, and interest added back into the total.

Investor and creditor often use EBITDA as a coverage ratio to compare big
companies that either have significant amounts of debt or large investments in fixed
assets because this measurement excludes the accounting effects of non-operating
expenses like interest and paper expenses like depreciation. Adding these expenses
back into net income allows us to analyze and compare the true operating cash flows
of the businesses.

34
FORMULA

The EBITDA formula is calculated by subtracting all expenses except interest, taxes,
depreciation, and amortization from total revenues.

EBITDA= Revenue – Expenses (Excluding taxes, interest, depreciation

&Amortization)

Often the equation is calculated in eely by starting with net income and adding back
the ITDA. Many companies use this measurement to calculate different aspects of
their business. For instance, since it is a non-GAAP calculation, you can pick and
choose what expenses are added back into net income. For example, it’s not
uncommon for an investor to want to see how debt affects a company’s financial
position without the distraction of the depreciation expenses. Thus, the formula can be
altered to exclude only taxes and depreciation.

ANALYSIS

So what is EBITDA? It's a profitability calculation that measures how profitable a

company is before paying interest to creditor, taxes to the government, and taking
paper expenses like depreciation and amortization. This is not a financial ratio.
Instead, it’s a calculation of profitability that is measured in Rupees rather than
percentages.
Like all profitability measurements, higher number are always preferred over lower
number because higher number indicate the company is more profitable. Thus, an
earnings before EBITDA of Rs.10000 is better than one of Rs.5000. This means the
fit company still has Rs.10000 left over after all of its operating expenses have been
paid to cover the interest and taxes for the year. In this sense, it’s more of a coverage
or liquidity measurement than a profitability calculation.

Since the earnings before EBITDA only computes profits in raw dollar amounts, it is
often difficult for investor and creditor to use this metric to compare different sized
companies across an industry. A ratio is more effective for this type of comparison
than a straight calculation.

35
 EBITDA MARGIN

The EBITDA margin takes the basic profitability formula and turns it into a financial
ratio that can be used to compare all different sized companies across and industry.
The EBITDA margin formula divides the basic earnings before interest, taxes,
depreciation, and amortization equation by the total revenues of the company-- thus,
calculating the earnings left over after all operating expenses (excluding interest,
taxes, depreciation, and a mort) are paid as a percentage of total revenue. Using this
formula a large company like Apple could be compared to a new start up in Silicon
Valley.

FORMULA

EBITDA MARGIN = EBITDA

Total Revenues

The basic earnings formula can also be used to compute the enterprise multiple of a
company. The EBITDA multiple ratio is calculated by dividing the enterprise value
by the earnings before ITDA to measure how low or high a company is valued
compared with it metrics. For instance a high ratio would indicate a company might
be currently overvalued based on its earnings.

EXAMPLE

Let’s look at an example and calculate both the adjusted EBITDA and margin for
Jake’s Ski House. Jake manufactures custom skis for both pro and amateur skied. At
the end of the year, Jake earned Rs.100000 in total revenues and had the following
expenses.

 Salaries: Rs.25,000
 Rent: Rs.10,000
 Utilities: Rs.4,000
 Cost of Goods Sold: Rs.35,000
 Interest: Rs.5,000
36
 Depreciation: Rs.15,000
 Taxes: Rs.3,000
Jake’s net income at the end of the year equals Rs.3000. Jake’s EBITDA is calculated
like this:

EBITDA

Rs. 26000= Rs.100000 – (Rs.25000 + Rs.10000 + Rs.4000 + Rs.35000)

As you can see, the taxes, depreciation and interest are added back into the net income
for the year showing the amount of earnings Jake was able to generate to cover his
interest and tax payments at the end of the year.

If investor or creditor wanted to compare Jake’s Ski shop with another business in the
same industry, they could calculate his margin like this:

EBITDA Margin

26% = Rs. 26000

Rs. 100000

The EBITDA margin ratio shows that every dollar Jake generates in revenues results
in 26 cents of profits before all taxes and interest is paid. This percentage can be used
to compare Jake’s efficiency and profitability to other companies regardless of size.

INTEREST COVERAGE RATIO

The interest coverage ratio is a financial ratio that measures a company’s ability to
make interest payments on its debt in a timely manner. Unlike the debt service
coverage ratio, this liquidity ratio really has nothing to do with being able to make
principle payments on the debt itself. Instead, it calculates the firm’s ability to afford
the interest on the debt.
37
Creditor and investor use this computation to understand the profitability and risk of a
company. For instance, an investor is mainly concerned about seeing his investment
in the company increase in value. A large part of this appreciation is based on profits
and operational efficiencies. Thus, investor want to see that their company can pay its
bills on time without having to sacrifice its operations and profits.

A creditor, on the other hand, uses the interest coverage ratio to identify whether a
company is able to support additional debt. If a company can’t afford to pay the
interest on its debt, it certainly won’t be able to afford to pay the principle payments.
Thus, creditor use this formula to calculate the risk involved in lending.

FORMULA

The interest coverage ratio formula is calculated by dividing the EBIT, or earnings
before interest and taxes, by the interest expense. Here is what the interest coverage
equation looks like.

Interest Coverage Ratio =EBIT (Earnings before Interest &Taxes)

Interest Expenses

As you can see, the equation uses EBIT instead of net income. Earnings before
interest and taxes is essentially net income with the interest and tax expenses added
back in. The reason we use EBIT instead of net income in the calculation is because
we want a true representation of how much the company can afford to pay in interest.
If we used net income, the calculation would be screwed because interest expense
would be counted twice and tax expense would change based on the interest being
deducted. To avoid this problem, we just use the earnings or revenues before interest
and taxes are paid.

You might also want to note that this formula can be used to measure any interest
period. For example, monthly or partial year number can be calculated by dividing the
EBIT and interest expense by the number of months you want to compute.

38
EXAMPLE

Let’s take a look at an interest coverage ratio example. Sarah’s Jam Company is a
jelly and jam jarring business that cans preservatives and ships them across the
country. Sarah wants to expand her operations, but she doesn’t have the funds to
purchase the canning machines she needs. Thus, she goes to several banks with
her financial statements to try to get the funding she wants. Sarah’s earnings before
interest and taxes is Rs.50000 and her interest and taxes are Rs.15000 and Rs.5000
respectively. The bank would compute Sarah’s interest coverage ratio like this:

Interest Coverage Ratio = Rs. 50000

Rs. 15000
As you can see, Sarah has a ratio of 3.33. This means that has makes 3.33 times more
earnings than her current interest payments. She can well afford to pay the interest on
her current debt along with its principle payments. This is a good sign because it
shows her company risk is low and her operations are producing enough cash to pay
her bills.

ANALYSIS

Analyzing a coverage ratio can be tricky because it depends largely on how much
risky the creditor or investor is willing to take. Depending on the desired risk limits, a
bank might be more comfortable with a number than another. The basics of this
measurement don’t change, however.

If the computation is less than 1, it means the company isn’t making enough money to
pay its interest payments. Forget paying back the principle payments on the debt. A
company with a calculation less than 1 can’t even pay the interest on its debt. This
type of company is beyond risky and probably would never get bank financing.

If the coverage equation equals 1, it means the company makes just enough money to
pay its interest. This situation isn’t much better than the last one because the company

39
still can’t afford to make the principle payments. It can only cover the interest on the
current debt when it comes due.

If the coverage measurement is above 1, it means that the company is making more
than enough money to pay its interest obligations with some extra earnings left over to
make the principle payments. Most creditor look for coverage to be at least 1.5 before
they will make any loans. In other words, banks want to be sure a company make at
least 1.5 times the amount of their current interest payments.

Going back to our example above, Sarah’s percentage is 3.33. She is making enough
money from her current operations to pay her current interest rates 3.33 times over.
Her company is extremely liquid and shouldn’t have problem getting a loan to
expand.

NET PROFIT MARGIN

The profit margin ratio, also called the return on sales ratio or gross profit ratio,
is a profitability ratio that measures the amount of net income earned with each dollar
of sales generated by comparing the net income and net sales of a company. In other
words, the profit margin ratio shows what percentage of sales are left over after all
expenses are paid by the business.

Creditors and investors use this ratio to measure how effectively a company can
convert sales into net income. Investors want to make sure profits are high enough to
distribute dividends while creditors want to make sure the company has enough
profits to pay back its loans. In other words, outside users want to know that the
company is running efficiently. An extremely low profit margin formula would
indicate the expenses are too high and the management needs to budget and cut
expenses.

The return on sales ratio is often used by internal management to set

performance goals for the future.

40
FORMULA

The profit margin ratio formula can be calculated by dividing net income by net
sales.

Profit margin ratio= Net Income

Net sales
Net sales is calculated by subtracting any returns or refunds from gross
sales. Net incomeequals total revenues minus total expenses and is usually the last
number reported on the income statement.

Analysis
The profit margin ratio directly measures what percentage of sales is made up of net
income. In other words, it measures how much profits are produced at a certain level
of sales.

This ratio also indirectly measures how well a company manages its expenses relative
to its net sales. That is why companies strive to achieve higher ratios. They can do this
by either generating more revenues why keeping expenses constant or keep revenues
constant and lower expenses.

Since most of the time generating additional revenues is much more difficult than
cutting expenses, managers generally tend to reduce spending budgets to improve
their profit ratio.
Like most profitability ratios, this ratio is best used to compare like sized companies
in the same industry. This ratio is also effective for measuring past performance of a
company.

Example

Trisha's Tackle Shop is an outdoor fishing store that selling lures and other fishing
gear to the public. Last year Trisha had the best year in sales she has ever had since

41
she opened the business 10 years ago. Last year Trisha's net sales were $1,000,000
and her net income was $100,000.

Here is Trisha's return on sales ratio.

Profit margin ratio

10% = Rs.100000
Rs.1000000
As you can see, Trisha only converted 10 percent of her sales into profits. Contrast
that with this year's numbers of $800,000 of net sales and $200,000 of net income.

This year Trisha may have made less sales, but she cut expenses and was able to
convert more of these sales into profits with a ratio of 25 percent.

42
CHAPTER 6.STATE BANK OF INDIA

EVOLUTION

The origin the State Bank of India goes back to the fit decade of the nineteenth
century with the establishment of the bank Bank of Calcutta in Calcutta on 2 June
1806. Three years later the bank received its charter was re-designed as the Bank of
Bengal (2 January1809). A unique institution, it was the fit joint stock bank of British
India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840)
and the Bank of Madras (1 July 1843) followed bank of Bengal. These three banks
remained at the apex of modern banking in India till their amalgamation as the
imperial bank of India on 27 January 1921.

Primarily Anglo-Indian creations, the three presidency banks came into existence
either as a result of the compulsions of imperial finance or by the felt needs of local
European commerce and were not imposed from outside in an arbitrary manner to
modernize India’s economy. Their evolution was, however, shaped by ideas culled
from similar developments in Europe and England, and was influenced by changes
occurring in the structure of both the local trading environment and those in the
relations of the Indian economy of Europe and the global economics framework.

43
ESTABLISHMENT

The establishment of the Bank of Bengal marked the advent of limited liability, joint
stock banking in India. So was the associated innovation in banking, viz. the decision
to allow the Bank of Bengal to issue notes, which would be accepted for payment of
public revenues within a restricted geographical area. This right of note issue was
very valuable not only for the Bank of Bengal but also its two siblings, the Banks of
Bombay and Madras it meant an accretion to the capital of the banks, a capital on
which the proprietor did not have to pay any interest. The concept of deposit banking
was also an innovation because the practice of accepting money for safekeeping (and
in some cases, even investment on behalf of the clients) by the indigenous banked had
not spread as a general habit in most parts of India. But, for a long time, and
especially up to the time that the three presidency banks had a rights of note issue,
bank notes and government balances made up the bulk of the investable resources of
the banks.

The three banks were governed by royal charter, which were revised from time to
time. Each charter provided for a share capital, four-fifth of which were privately
subscribed and the rest owned by the provincial government. The member of the
board of director representing the large European managing agency houses in India
.The rest were government nominees, invariably civil servants, one of the whom
elected as the president of the board.

44
BUSINESS

The business of the banks was initially confined to discounting of bills of exchange or
other negotiable private securities, keeping cash accounts and receiving deposits and
issuing and circulating cash notes. Loans were restricted to, One Lakh and the period
of accommodation confined to three months only. The security for such loans was
public securities, commonly called company’s paper, bullion, treasure, plate, jewels,
or goods ‘not of a perishable nature’ and no interest could be charged beyond a rate of
twelve per cent. Loans against goods like opium, indigo, salt woolens, cotton, cotton
piece goods, mule twist and silk goods were also granted but such finance by way of
cash credits gained momentum only from the third decade of the nineteenth century.
All commodities, including tea, sugar or jute which began to be finance later, were
either pledged or hypothecated to the bank. Demand promissory notes were signed by
the borrower in favour of the guarantor, which was in turn endowed to the bank.
Lending against shares of the banks or on the mortgage of houses, land or other real
property was, however, forbidden.Indianswere the principle borrowed against
deposits of company’s paper, while the business of discounts on private as well as
salary bills was almost the exclusive monopoly of individuals Europeans and their
partnership firms. But the main function of the three banks as far as the government
was concerned, was to help the latter raise loans from and also provide a degree of
stability to the prices of government securities.

45
MAJOR CHANGE IN THE CONDITIONS

A major change in the conditions of operation of the Banks of Bengal, Bombay

andMadras occurred after 1860. With the passing of the Paper Currency Act of 1861,
theright of note issue of the presidency banks was abolished and the Government of
Indiaassumed from 1 March 1862 the sole power of issuing paper currency within
British India. The task of management and circulation of the new currency notes was
conferredon the presidency banks and the Government undertook to transfer the
Treasurybalances to the banks at places where the banks would open branches. None
of thethree banks had till then any branches (except the sole attempt and that too a
short-lived one by the Bank. But as soon as the three presidency bands were assured
of the freeuse of government Treasury balances at places where they would open
branches, theyembarked on branch expansion at a rapid pace. By 1876, the branches,
agencies and sub agencies of the Bengal at Mirzapore in 1839) although the charter
had giventhem such authority presidency banks covered most of the major parts and
manyof the inland trade centre in India. While the Bank of Bengal had eighteen
branchesincluding its head office, seasonal branches and sub agencies, the Banks of
Bombay andMadras had fifteen each.

46
PRESIDENCY BANKS ACT

The presidency Banks Act, which came into operation on 1 May 1876, brought the
threepresidency banks under a common statute with similar restrictions on business.
Theproprietary connection of the Government was, however, terminated, though the
bankscontinued to hold charge of the public debt offices in the three presidency
towns, and thecustody of a part of the government balances. The Act also stipulated
the creation ofReserve Treasuries at Calcutta, Bombay and Madras into which sums
above the specifiedminimum balances promised to the presidency banks at only their
head offices were tobe lodged. The Government could lend to the presidency banks
from such ReserveTreasuries but the latter could look upon them more as a favour
than as a right.

47
BANK OF MADRAS

The decision of the Government to keep the surplus balances in Reserve Treasuries
outside the normal control of the presidency banks and the connected decision not to
guarantee minimum government balances at new places where branches were to be
opened effectively checked the growth of new branches after 1876. The pace of
expansion witnessed in the previous decade fell sharply although, in the case of the
Bank of Madras, it continued on a modest scale as the profits of that bank were
mainly derived from trade dispend among a number of port towns and inland center of
the
Presidency.India witnessed rapid commercialization in the last quarter of the
nineteenth century assist railway network expanded to cover all the major regions of
the country. New irrigation networks in Madras, Punjab and Sind accelerated the
process of conveyingof subsistence crops into cash crops, a portion of which found its
way into the foreign markets. Tea and coffee plantations transformed large areas of
the eastern Terrain, the hills of Assam and the Nilgiris into regions of estate
agriculture par excellence.
All these resulted in the expansion of India's international trade more than six-
fold. The three presidency banks were both beneficiaries and promote of this
commercialization process as they became involved in the financing of practically
every trading, manufacturing and mining activity in the sub-continent. While the
Banks of Bengal and Bombay were engaged in the financing of large modern
manufacturing industries, the Bank of Madras went into the financing of large modern
manufacturing industries, the Bank of Madras went into the financing of small-scale
industries in a way which had no parallel elsewhere. But the three banks were
rigorously excluded from any business involving foreign exchange. Not only was
such business considered risky for these banks, which held government deposits, it
was also feared that these banks enjoying government patronage would offer unfair
competition to the exchange banks which had by then arrived in India. This exclusion
continued till the creation of the Reserve Bank of India in 1935.

48
PRESIDENCY BANKS OF BENGAL

The presidency Banks of Bengal, Bombay and Madras with their 70 branches were
merged in 1921 to form the Imperial Bank of India. The triad had been transformed
intoa monolith and a giant among Indian commercial banks had emerged. The new
bank took on the triple role of a commercial bank, a banker's bank and a banker to
thegovernment.But this creation was preceded by yea of deliberations on the need for
a 'State Bank of India'. What eventually emerged was a 'half-way house' combining
the functions of commercial bank and a quasi-central bank. The establishment of the
Reserve Bank of India as the central bank of the country in1935 ended the quasi-
central banking role of the Imperial Bank. The latter ceased to be banked to the
Government of India and instead became agent of the Reserve Bank for the
transaction of government business at centres at which the central bank was not
established. But it continued to maintain currency chests and small coin depots and
operate the remittance facilities scheme for other banks and the public on terms
stipulated by the Reserve Bank. It also acted as a banked bank by holding their
surplus cash and granting them advances against authorized securities. The
management of the bank clearing houses also continued with it at many places where
the Reserve Bank did not have offices. The bank was also the biggest renderer at the
Treasury bill auctions conducted by the Reserve Bank on behalf of the Government.
The establishment of the Reserve Bank simultaneously saw important amendments
being made to the constitution of the Imperial Bank converting it into a purely
commercial bank. The earlier restrictions on its business were removed and the bank
was permitted to undertake foreign exchange business and executor and trustee
business for the fit time.

49
IMPERIAL BANK

The Imperial Bank during the three and a half decades of its existence recorded an
impressive growth in terms of offices, reserves, deposits, investments and advances,
the increases in some cases amounting to more than six-fold. The financial status and
security inherited from its forerunner no doubt provided a firm and durable platform.
But the lofty traditions of banking which the Imperial Bank consistently maintained
and the high standard of integrity it observed in its operations inspired confidence in
its depositor that no other bank in India could perhaps then equal. All these enabled
the Imperial Bank to acquire a pre-eminent position in the Indian banking industry
and also secure a vital place in the country's economic life.
When India attained freedom, the Imperial Bank had a capital base (including
reserves)of .11.85 corers, deposits and advances of .275.14 corers and. 72.94 corers
respectively and a network of 172 branches and more than 200 sub offices extending
all over the country.

50
FIRST FIVE YEAR PLAN

In 1951, when the Fit Five Year Plan was launched, the development of rural India
was given the highest priority. The commercial banks of the country including the
Imperial Bank of India had till then confined their operations to the urban sector and
were not equipped to respond to the emergent needs of economic regeneration of the
rural areas. In order, therefore, to serve the economy in general and the rural sector in
particular, the All India Rural Credit Survey Committee recommended the creation of
a state partnered and state-sponsored bank by taking over the Imperial Bank of India,
and integrating with it, the former state-owned or state-associate banks. An act was
accordingly passed in Parliament in May 1955 and the State Bank of India was
constituted on 1 July 1955. More than a quarter of the resources of the Indian banking
system thus passed under the direct control of the State. Later, the State Bank of
India(Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to
takeover eight former State-associated banks as its subsidiaries (later named
Associates).The State Bank of India was thus born with a new sense of social purpose
aided by the480 offices comprising branches, sub offices and three Local Head
Offices inherited from the Imperial Bank. The concept of banking as mere
repositories of the community’s savings and lender to creditworthy parties was soon
to give way to the concept of purposeful banking sub serving the growing and vivified
financial needs of planned economic development. The State Bank of India was
destined to act as the pacesetter in this respect and lead the Indian banking system into
the exciting field of national development.

51
 CHAPTER 7. DATA ANALYSIS & INTERPRETATION OF
FINANCIAL STATEMENTS

DATA ANALYSIS

NO. RATIOS YEAR 2016-2017 Answer

1 Quick ratio (127997.62+43974.03+154007.72) ÷ 2.10 times

155235.19

2 Retention rate ratio 8069.16 ÷ 10484.42 × 100 76.96%

3 Return on assets 210979.17- 2.87%

ratio (26489.28+58053.97+2293.31+4647
2.77) ÷ 2705966.30

4 Return on capital 210979.17(26489.28+58053.97+229 3.05%

employed 3.31+46472.77)÷ (2705966.30 –
155235.19)

5 EBITDA 210979.17- 79963.15

(26489.28+58053.97+46472.77)

6 EBITDA Margin 210979.17- 37.90%

(26489.28+58053.97+46472.77)
÷210979.17

7 Return on Equity 10484.10÷(797.35+187488.71) 5.57%

52
8 Interest coverage (10484.10+40363.79)÷ 113658.50 0.477times
ratio

9 Net profit margin (10484.10÷210979.17)×100 4.97%

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 INTRPRETATION

NO RATIO YEAR YEAR INCREASE/DECREASE Favourable/

2015-2016 2016-2017 Un-
DIFFERENCE
Favourable

1 Quick ratio 1.93times 2.10 times 0.17 times Favourable

2 Retention rate 76.35% 76.96% 0.61% Favourable

ratio

3 Return on assets 3.25% 2.87% 0.38% Un-

ratio Favourable

4 Return on capital 3.41% 3.05% 0.36% Un -

employed Favourable

5 EBITDA 776672.1 79963.15 696708.95 Favourable

6 EBITDA Margin 39.96% 37.90% 2.06% Un-

Favourable

7 Return on Equity 6.90% 5.57% 1.33% Un-

Favourable

8 Interest coverage 0.405time 0.477time 0.072 times Favourable

ratio s s

9 Net profit margin 5.19% 4.97% 0.22 Un-

Favourable

54
NO. RATIOS YEAR 2015-2016 Answer

1 Quick ratio (129629.33+37838.33+140408.41) ÷ 1.93times

159276.08

2 Retention rate ratio 7597.83 ÷9950.98× 100 76.35%

3 Return on assets 191843.67- 3.25%

ratio (25113.82+48275.39+41782.36) ÷
2357617.64

4 Return on capital 191843.67- 3.41%

employed (25113.82+48275.39+1700.30+4178
2.36) ÷(2357617.54-159276.08)

5 EBITDA 191843.67- 776672.1

(25113.82+48275.39+41782.36)

6 EBITDA Margin 191843.67- 39.96%

(25113.82+48275.39+41782.36)
÷191843.67

7 Return on Equity 9950.65÷(776.28+143498.16) 6.90%

8 Interest coverage (9950.65+33307.15)÷ 106803.49 0.405times

ratio

9 Net profit margin (9950.65÷191843.67)×100 5.19%

55
State Bank of India

Balance Sheet as on 31st March

(000’s omitted)

Schedule As on 31.03.18 As on 31.03.17

No. (Current Year) (Previous Year)

CAPITAL AND
LIABILITIES

Capital 1 892,45,88 797,35,04

Reserves & Surplus 2 218236,10,15 187488,71,22

Deposits 3 2706343,28,50 2044751,39,47

Borrowings 4 362142,07,45 317693,65,83

Other Liabilities and 5 167138,07,68 155235,18,85

Provisions

TOTAL 3454751,99,66 2705966,30,41

ASSETS

Cash and balance with 6 150397,18,14 127997,61,77

Reserve Bank of India

Balances with Banks and 7 41501,46,05 43974,03,21

money at call and short
notice

Investments 8 1060986,71,50 765989,63,09

56
Advances 9 1934880,18,91 1571078,38,11

Fixed Assets 10 39992,25,11 42918,91,79

Other Assets 11 226994,19,95 154007,72,44

TOTAL 3454751,99,66 2705966,30,41

Contingent Liabilities 12 1162020,69,30 1046440,93,19

Bills for collection - 74027,90,24 65640,42,04

Significant Accounting 17
Policies

Notes to Accounts 18

57
State Bank of India

Profit & Loss Account for the year ended 31st March, 2018

(000’s omitted)

Schedule Year ended Year ended

No. 31.03.2018 31.03.2017
(Current Year) (Previous Year)

I. INCOME

Interest earned 13 220499,31,56 175518,24,04

Other Income 14 44600,68,71 35460,92,75

TOTAL 265100,00,27 210979,16,79

II. EXPENDITURE

Interest expended 15 145645,60,00 113658,50,34

Operating expenses 16 59943,44,64 46472,76,94

Provisions & contingencies 66058,41,00 40363,79,25

TOTAL 271647,45,64 200495,06,53

III. PROFIT

Net Profit/ (Loss) for the (6547,45,37) 10484,10,26

year

Add: Profit brought forward 31,68 31,68

Loss of eABs& BMB on (6407,68,97) -

amalgamation

TOTAL (12954,82,66) 10484,41,94

58
IV. APPROPRIATIONS

Transfer to Statutory - 3145,23,08

Reserve

Transfer to Capital Reserve 3288,87,88 1493,38,64

Transfer to Revenue and (1165,13,68) 3430,54,64

other Reserves

Dividend for the current - 2108,56,29

year

Tax on Dividend for the - 306,37,61

Current year

Balance carried over to (15078,56,86) 31,68

Balance Sheet

TOTA L (12954,82,66) 10484,41,94

Basic Earnings per Share Rs.-7.67 Rs.13.43

Diluted Earnings per Share Rs.-7.67 Rs.13.43

Significant Accounting 17
Policies

Notes to Accounts 18

59
 Conclusion

Analysis and interpretation of financial statements is an important tool in

assessing company’s performance. It reveals the strength and weakness of a firm. It
helps the clients to decide in which firm the risk is less or in which one they should
invest so that maximum benefit can be earned. It is known that investing in any
company involves a lot of risk. So before putting up money in any company one must
have thorough knowledge about its past records and future.

This project of financial analysis & interpretation concern is not merely a

work of the project but a brief knowledge and experience of that how to analyse the
financial performance of the firm. This project mainly focuses on the basis of
different types of financial statements, Balance Sheet and Profit & Loss Account of
SBI.

State Bank of India is presently doing well. Increasing the service every year.
But still, if some operating expenses will be reduced then it will become strong. And
more over it would be better if it provides more services to the public like, credit
loans, home loans, less interest rates and more online service will be provided to
customer. The state bank has been highly successful in its objectives in opening a
network of branches in rural and semi- urban areas. It has established itself as the
largest commercial bank of the country. Further, it has helped in developing
agriculture, small industry and business, and uplifting the weaker sections and priority
sectors through liberal credit facilities. Besides, it operates a number of customer
oriented services, engages in export promotion and successfully carries out overseas
operations.

60
BIBOLIOGRAPHY

https://www.accountingtools.com/articles/2017/5/14/financial-statement-analysis

Tahttp://www.thebusinessquiz.com//2014/11/13/indian-banks-the-story-bank-of-
india/gline:the banker to every India

http://economicstimes.indiatimes.com/state-bank-of-
india/infocompanyhistory/companyid/119840cms

googleweblight.com/i?u=http://profit.ndtv.com/stock/state-bank-of-
india_sbin/financials&grqid=9wy9A_Ot&hl=en_IN

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