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Instructor:
Lanie D. Brodeth
MM504 Financial Planning and Control
Second Semester, 2015 2016
Mr. Cerenio Adriatico
ABSTRACT
The aims of this research are to examine the applicability of Altman Z
score in determining the financial performance of Security Bank and
Philippine Business Bank being two studied bank institutions between 2013
and 2014. It also tries to use DuPont Analysis to examine whether their
company successes earns a high net profit margin; uses its assets effectively
to generate more sales; and/or it has a high financial leverage.
Between their integral effort with loans, savings, financing and
property investments as reported in the Securities and Exchange
Commission, the researcher inclines to determine sources of management
discussions, inferences or somehow futuristic views given the financial facts
with these two sampling years (2013 2014).
It has been found out that Security Bank and Philippine Business Bank
during its 2013 2014 business performance is not failing or cannot be both
classified as candidate for bankruptcy. They operate a much stable not
failing type of business operation with a relative increase per year. The two
studied banks both has comparable liquid assets in relation to their size of
the company; they conduct comparable profitability that reflects the
company's age and earning power; including its operating efficiency apart
from tax and leveraging factors; in adding market dimension that can show
up security price fluctuation as a possible red flag and sales turnover
On the other hand their performance in terms of return of equity, infers
that Security Bank has high profit margin and find it little lower asset returns
though they are more financially pliable than Philippine Business Bank. The
Philippine Business Bank has very low profit margin but they sale out their
products and services more in numbers as that compared with Security Bank
as shown in their total asset turnover.
INTRODUCTION
Both management of Security Bank Corporation (Security Bank) and
the Philippine Business Bank Inc. A Savings Bank (PBB) are responsible for all
METHOD
The Altman Z score determines the financial performance of Security
Bank and PBB while the DuPont Analysis examines whether their company
success earns a high net profit margin; uses its assets effectively to generate
more sales; and/or it has a high financial leverage
Altman's Z-Score Model (1968)
This model is based on five independent variables, each of them
representing financial ratios and the rates recognized by the dependent
variable (Z). It was developed to complement the model developed by
Altman in 1968. The Altmans Z-Score Method was developed by Dr. Altman
in 1968. It is a multivariate formula to measure the financial health of a
company on whether it will enter into bankruptcy in the forthcoming two
years. This method uses five common business ratios: earnings before
interest and tax (debit)/total assets ratio, sales/total assets ratio, market
value of equity/market value of total liabilities, working capital/total asset
ratio and retained earnings/total assets (Edward, 1968).
The original Altmans Z-score formula was as follows:
Z = 0.012X1 + 0.014 X2 + 0.033X3 + 0.006X4 + 0.010 X5
Where;
Working Capital
X1 =
___________________
Total Assets
Measures liquid assets in relation to the size of the company
X2 =
Retained Earnings
____________________
Total Assets
X4 =
____________________
Book Value of total debt
X5 =
Sales
____________________
Total Assets
Altman Z Score
<1.81
>2.99
The Dupont analysis looks at three main components of the ROE ratio.
Profit Margin
Total Asset Turnover
Financial Leverage
Formula
The Dupont Model equates ROE to profit margin, asset turnover, and
financial leverage. The basic formula looks like this.
DuPont Analysis
Return on Equity = Profit Margin x Total Asset Turnover x Financial Leverage
DuPont Analysis
Profit Margin x
Leverage
Financial
Return on Equity =
Assets
Net Income
Net Sales
Net Sales
Total
Total
Equity
This model was developed to analyze ROE and the effects different
business performance measures have on this ratio. So investors are not
looking for large or small output numbers from this model. Instead, they are
looking to analyze what is causing the current ROE. For instance, if investors
are unsatisfied with a low ROE, the management can use this formula to
pinpoint the problem area whether it is a lower profit margin, asset turnover,
or poor financial leveraging.
Altman
Coefficie
nt
Security Bank
2014 - 2013
.012
Year 2
12.49%
Year 1
12.02%
.014
1.82%
1.46%
Philippine
Business Bank
2014 - 2013
Year 2
Year 1
14.90% 13.83%
1.87%
1.83%
.033
20.40%
15.93%
17.95%
18.40%
.006
16.53%
14.64%
17.51%
16.10%
.010
18.88%
21.38%
19.56%
18.65%
13.05
11.16
13.34
13.12
(3.61)
(3.34)
(3.65)
(3.62)
By using the table for the threshold for financial failure, it has been
found out that Security Bank and Philippine Business Bank during its 2013
2014 business performance is not failing or cannot be both classified as
candidate for bankruptcy. They operate a much stable not failing type of
business operation with a relative increase per year.
The two studied banks both has comparable liquid assets in relation to
their size of the company; they conduct comparable profitability that reflects
the company's age and earning power; including its operating efficiency
apart from tax and leveraging factors; in adding market dimension that can
show up security price fluctuation as a possible red flag and sales turnover
Table 2.0 Results on DuPont Analysis of Philippine Business Bank and Security
Bank
DuPont Ratios
Profit Margin
Total Asset Turnover
Financial Leverage
Return on Equity (ROE)
Security Bank
Year 2
92.38%
1.48%
831.94%
0.11
Year 1
89.26%
2.17%
828.24%
0.16
Philippine Business
Bank
Year 2
Year 1
18.25%
21.15%
8.59%
9.53%
671.14% 722.98%
0.11
0.15
On the other hand comparing the performance of the two banks with
the factors considered in their return of equity, we may infer that Security
Bank has high profit margin and find it hard for higher asset returns though
they are more financially pliable than Philippine Business Bank.
The Philippine Business Bank has very low profit margin but they sale
out their products and services more in numbers as that compared with
Security Bank as shown in their total asset turnover.