Commercial Bank of Dubai disclosed its financial results with reports of positive prospects. The bank had registered a one percent increment in its net profit as compared to the previous year with AED 0.40 earnings per share. Its return on average equity and return on average assets were reported at 17.61 % and 2.72% respectively, with further clarification that the bank’s return on average assets was among the highest in the industry. Capital adequacy ratio, loans to deposit ratio, and advances to stable resources ratio were reported at 24.91 %, 94.1 %, and 82.2 % respectively. This paper seeks to assess the liquidity and stock performance of the company. In order to achieve this, the paper will explore the significance and implications of the above ratios.
Financial ratios analysis
Assessment of the financial position of an enterprise is achieved through sufficient ratio analysis. Financial ratios offer a comparative platform for evaluating the performance of an enterprise over periods of time as well as facilitating comparison with other enterprises in a given industry. The significance of ratio analysis is for example identified in monitoring and evaluating liquidity and share performance of an institution. The liquidity of a firm refers to its ability to meet its current liability obligations, which include current loans and debts and their corresponding accrued interest. An understanding of the liquidity status of an entity, therefore, provides its creditors potential financiers, and investors with sufficient information for informed judgment. Posting strong liquidity ratios, low percentages, would therefore portray a positive image for easy access to finances. This is because financiers, including equity shareholders in a business enterprise, are always interested in the financial capacity of their organization (Khan & Jain 6.42).
Stock performance is evaluated by factors such as share prices, share turnover, and returns on shares. These indicators are derivatives of the overall performance of a company through profitability, activity, and liquidity. Investors’ willingness to invest in an enterprise is for instance dependent on the business’s capacity to pay returns on investments as well as the capacity to express stability. Both current and equity investors are with this respect influenced to trade in an organization’s shares and hence contributing to its shares’ turnover. A company’s performance, which leads to demand for its shares, also translates to high share prices. Analysis of share performance of a company through turnover rate of its shares as well as its share prices and returns per share are therefore important aspects of ratio analysis (Brigham & Houston, 98).
The company’s liquidity ratios, as expressed through the loans to deposit ratio and advances to stable resources ratio, are positive and favorable. Loans to deposit ratio of 94.1 %, a value below 100% means that the bank is still in a good position to finance its current loans and an indicator that the company is not under threat of insolvency. The capital adequacy ratio of the bank, being rated as one of the highest in the industry, and 82.2 % advances to stable resources ratio further confirm that the entity has positive liquidity ratios. Similarly, the bank has good stock performance ratios that were indicated by the oversubscription of its floated equity. High return on average equity as well as the company’s consistency in profitability also indicates incentives to high stock performance. The bank, therefore, has positive liquidity and stock performance ratios.
Brigham, Eugene and Houston, Joel. Fundamentals of Financial Management. Mason, OH: Cengage Learning, 2009. Print
Khan, M. and Jain, P. Management Accounting. New Delhi, India: Tata McGraw-Hill Education, 2006. Print