Chapter II: Research Design and Methods

Research Design

The unit of analysis in this research is a combination of individual and organization. The
researchers are interested in the attitudes and behaviors of an aggregate of individuals as well as
business organization in form of banks. The point of focus consists of orientations which refer to
the managers and the organizations philosophies, purposes, policies, regulations, processes, and
procedures. On the other hand, the time dimension of this study is longitudinal which is designed
to permit observation of a unit of study over an extended period of time. To be specific, the
researchers used trend analysis that looks into the dynamics of a particular attribute of the
population over time.

This research is descriptive in nature. Since the purpose of this study is to gain better
insight of the determinant of profitability, the descriptive design will be adopted. The descriptive
design will be utilized in identifying the level of performance of China Bank Corporation and
Rizal Commercial Banking Corporation using the liquidity ratios, asset management ratios, debt
management ratios, market value ratios, and profitability ratios. As part of the description, the
comparative design will be used in order to compare the financial performance of the two banks
under study for a period of five year from 2009 to 2014. T-test for the difference of two means
will be utilized for purpose of comparing the two sets of data. In addition to the descriptive and
comparative design, this study will also seek to identify the relationship of the liquidity ratios,
asset management ratios, debt management ratios, market value ratios, to the profitability ratios.
In doing so, regression analysis will be utilized in order to not only determine the degree of
relationship among the variables but to also determine which among the said ratios can be used
as critical predictor/s of the business profitability measures.

Sources of Data

Secondary data will be employed in the conduct of this study. The secondary data will be
comprised of financial statements for the years 2009 to 2014.
Data Analysis Procedure

The following financial ratios will be computed using the following formulation as
discussed by Koh, et.al, 2014:

1. Liquidity Ratios

Current Ratio is calculated by dividing current asset by current liabilities:

Current ratio = Current assets/Current Liabilities

Quick, or Acid Test Ratio = (Current Assets Inventories)/ Current Liabilities

2. Asset Management Ratios

Day Sales Outstanding, also called the average collection period (ACP), is used to appraise
accounts receivable, and is calculated by the dividing accounts receivable by average daily sales.

ACP = Receivables/Average Sales per day OR

Receivables/ (Annual Sales/ 365)

Fixed Assets Turnover Ratio, it is the ratio of sales to net fixed assets.

Fixed Assets Turnover Ratio = Sales/ Net Fixed Assets

Total Assets Turnover Ratio is calculated by dividing sales by total assets.

Total Assets Turnover Ratio = Sales/Total Assets

3. Debt Management Ratios

Debt Ratio is computed by dividing total liabilities to total assets. It measures the percentage of
funds provided by current liabilities and long-term debt.

Debt Ratio = Total liabilities/ Total Assets

Debt-to- Equity Ratio = Total liabilities/ (Total assets - Total liabilities)

Market debt Ratio = Total liabilities/ (Total liabilities + Market value of equity)
Time-interest-earned Ratio, also called the interest coverage ratio, is determined by dividing
earnings before interest and taxes (EBIT) by the interest expense.

Time-interest-earned Ratio = EBIT/ Interest Expense

4. Market Value Ratios

Price/Earnings Ratio shows how much investors are willing to pay per dollar of reported profits.

Price/Earnings Ratio = Price per Share/ earnings Per Share

Price/Cash Flow Ratio = Price per Share/ Cash Flow per Share

Market/Book Ratio = Market price per share/ book value per share

5. Profitability Ratios

Operating Profit Margin = EBIT / Sales

Gross Profit Margin = (Sales Cost of goods sold) / Sales

Basic Earning Power (BEP) Ratio = EBIT / Total Assets

Net Profit Margin, which is also called the profit margin on sales, is calculated by dividing net
income by sales.

Net Profit Margin = Net income available to common stockholders

Sales
Return on Assets (ROA) = Net income available to common stockholders
Total Assets
Return on Common Equity (ROE) = Net income available to common stockholders
Common Equity

To facilitate comparison between the financial ratios of the China Bank and RCBC, the t-
test for the difference in two means will be utilized. This test will provide a statistical analysis of
the significant difference in the computed ratios for the two Banks under study. Using a 0.05
level of significance the null hypothesis of no difference in the financial ratios of the two banks
will be determined through the computed t-statistics and p-value. The general rule is to reject the
null hypothesis if the p-value is less than 0.05 (the significance level to be used in this study).

On the other hand, regression analysis will be utilized in order to determine the degree of
relationship among the liquidity ratios, asset management ratios, debt management ratios, market
value ratios, and profitability ratios. The multiple regression analysis has the ability to produce
the correlation values (r, which measure the degree of relationship among variables) and the
slope (also known as regression coefficients, or simply, b). While r measures the degree of
relationship, the coefficients on the other hand will indicate the incremental increase or decrease
in the values of the dependent variable (the profitability ratios) as the independent variables
(liquidity ratios, asset management ratios, debt management ratios, market value ratios) increase
or decrease. The independent variable/s that registers high correlation values and high
coefficients are the critical indicator/s of the profitability measures. The multiple regression
results for China Bank and RCBC will be compared to provide evidence on the similarities in the
effect or degree of relationship of liquidity ratios, asset management ratios, debt management
ratios, market value ratios with the profitability ratios. The Statistical Package for Social Science
(SPSS ver. 20) will be utilized for this purpose.