1.

0 INTRIODUCTION

1.1 Objective:
I. To fulfil the course requirement of Financial Accounting-II; ACN-1309.
II. To calculate different financial ratios from the annual reports and
analyze the financial statements.
III. To look into the performance of Mercantile Bank Limited.

1.2 Scope:
In this report we only concentrated on the ratio analysis which we had completed in
the course entitled Financial Accounting –II; ACN-1309.

1.3 Limitations:
I. Limited knowledge in this field prevented us from presenting an in
depth analysis.
II. As there was limited time, we could not go through proper resources,
like emergency primary data sources.

1.4. Methodology:
The information required was collected from analyzing the financial statements of
Mercantile Bank Limited.

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2.0 COMPANY OVERVIEW:

Mercantile Bank Limited emerged as a new commercial bank to provide efficient

banking services and to contribute socio-economic development of the country. The
Bank commenced its operation on June 2, 1999.

The Bank provides a broad range of financial services to its customers and corporate
clients. The Board of Directors consists of eminent personalities from the realm of
commerce and industries of the country.

Vision:
 Would make first corporate citizen.

Mission:
 Will become most caring, focused for equitable growth based on diversified
deployment of resources, and nevertheless would remain healthy and gainful
profitable Bank.

Objectives:

Strategic Objectives
 To achieve positive Economic Value Added (EVA) each year.
 To be market leader in product innovation.
 To be one of the top three Financial Institution in Bangladesh in terms of cost
efficiency.
 To be one of the top five Financial Institution in Bangladesh in terms of market
share in all significant market segments we serve.

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Financial Objectives:
 To achieve 20% return on shareholder’s equity or more, on average.

Core Values:

For the Customers

Providing with caring services by being innovative in the development of new
banking products and services.

For the Shareholders

Maximizing wealth of the Bank.

For the Employees

Respecting worth and dignity of individual employees devoting their energies for the
progress of the Bank.

For the Community

Strengthening the corporate values and taking environment and social risks and
reward into account.

New Technology:
Adopting the state of the art technology in banking operation.

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3.0 RATIO ANALYSIS:

Investors look upon the profitability and market test ratios to analyze a company’s
ability to make profit and give dividends. Profitability is a very important measure of
a company’s operating success. Market test ratios help investors to assess the relative
merits of the various stocks in the market.
These ratios can be broadly classified into:
• Liquidity Ratios: These are used to indicate a company’s short term debt
paying ability. Thus these ratios are used to show the company’s capacity to
meet the maturing liabilities to the interested parties.

• Equity Ratios: These ratios show the relationship between debt and equity
financing in a company.

• Profitability Tests: This is an important source of a company’s operating

success. These ratios use two sources:
1. Company’s ability to recover costs and expenses using the income
statement.
2. The company’s ability to earn income on the assets employed using
the balance sheet.

• Market Tests: These ratios are calculated using the market price of the shares.
They help the existing as well as the potential customers to assess the relative
merits of the various stocks in the market place.

From the analysis of financial statements of Mercantile Bank Limited we calculated

the following ratios to understand the characteristics of its banking and compare it
with other banks in the industry.

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1. Accounts Receivable Turnover:
A measure of the liquidity of receivables; computed by dividing net credit sales by
average net receivables. In banking sector in case of Net Credit Sales they use Interest
Income. We can measure liquidity by how quickly a company can convert certain
assets to cash.

Accounts Receivable Turnover = Interest Income ÷ Average Net Accounts

Receivables

MBL FY 2008 (BDT)

Interest Income 4,875,241,879
Average Accounts Receivables 184,299,626.5
Accounts Receivables Turnover 26.45

* Mercantile Bank use Accrued Interest as their Account Receivable.

In the FY 2008 Mercantile Bank Limited on an average collects receivables 26.45

times during the period

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2. Average Collection Period in Days:
A variant of the accounts receivable turnover ratio that makes the liquidity even more
evident is its conversion into an average collection period in terms of days. This is
done by dividing the turnover ratio into 365 days.

Average Collection Period in Days = 365 ÷ Accounts Receivable Turnover

MBL FY 2008 (BDT)

Days in Year 365
Accounts Receivables Turnover 26.45
Average Collection Period in Days 13.79

We can say that it took Mercantile Bank Limited about 13.79 days to collect its
accounts receivables.

3. Asset Turnover Ratio:

This ratio shows the efficiency with which a company uses its assets to generate its
income.

Total Assets Turnover = Net Interest Income ÷ Average Total Assets

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 MBL FY 2008 (BDT)
Net Interest Income 4,875,241,879
Average Total Asset 5,043,4629,278.5
Total Asset Turnover 0.0966

Asset turnover shows that in 2008 Mercantile Bank Limited generated Interest
Income of TK. 0.0966 for each taka it had invested in asset.

4. Working Capital:
This is calculated by adding total current asset and total current liability.

Working Capital = Current Asset - Current Liabilities

MBL FY 2008 (BDT)

Current Assent 55,245,721,593
Current Liabilities 9,248,563,633.5
Working Capital 45,997,157,959.5

* Mercantile Bank Limited used to take 100% of Borrowing from Bangladesh Bank
and Other Banks, 15% of Deposits and 10% of Other Accounts as Current Liabilities.

5. Current Ratio:

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This is calculated by dividing current assets by the current liabilities. This ratio
indicates the company’s ability to pay off its debts using its immediately available
assets. The higher the ratio is, the higher the ability of the company to pay its
liabilities.

Working Capital Ratio= Current Assets ÷ Current Liabilities

MBL FY 2008 (BDT)

Current Assent 55,245,721,593
Current Liabilities 9,248,563,633.5
Working Capital Ratio 5.97:1

The 2008 ration of 5.97:1 means that for every taka of current liabilities, Mercantile
Bank has Tk. 5.97 of current asset. Here liquidity position is satisfactory.

6. Book Value per Share:

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It represents the equity a common stockholder has in the net assets of the corporation
from owning one share of stock.

Book Value per Share = Total Stockholder’s Equity ÷ Number of Common

Shares Outstanding.

MBL FY 2008 (BDT)

Total Stockholder’s Equity 3,617,332,110
Number of Common Shares Outstanding 17,986,779
Book Value per Share 201.11

In the year 2008 the equity a common stockholder has in the net assets of the
corporation from owning one share of stock is Tk. 201.11

7. Return on Common Stockholder’s Equity:

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Investors and analysts can measure profitability from the view point of the common
shareholder by the return on common stockholder’s equity. This ratio shows how
many taka of net income the company earned for each taka invested by the
stockholders.

Return on Common Stockholder’s Equity = Net income Available to Common

Stockholder ÷ Average Common Stockholder’s Equity

* (Net income Available to Common Stockholder = Net Interest Income – Preferred

Stock Dividend)

MBL FY 2008 (BDT)

Net income Available to Common Stockholder 615,883,381
Average Common Stockholder’s Equity 3,273,317,994.5
Return on Common Stockholder’s Equity 0.188

* Mercantile Bank Limited did not have any Preferred Stock Dividend.

Mercantile Bank Limited’s return on common stock holder’s equity is high at 18.8%.
This ratio shows tk. 0.188 of net income the company earned for each taka invested
by the stockholders.
8. Earnings per Share:

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Earnings per share are a measurement of the net income earned on each share of
common stock. It is computed by dividing net interest income by the number of
weighted average common outstanding shares during the year.

Earnings per Share = Net Inertest Income ÷ Weighted Average Common share
Outstanding.

MBL FY 2008 (BDT)

Net Income 615,883,381
Weighted Average Common share Outstanding. 17,986,779
Earnings per Share 34.24

* Here Net Income is Total Profit after Taxation.

Tk. 34.24 earned on each share of common stock during the year 2008. In the year
2007 the EPS was 30.05. Mercantile Bank Limited’s EPS increased tk.4.19.

4.0 CONCLUSION

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After completing the term paper we found that Mercantile Bank is performing very
well in every side. We found that their EPS and book value per share increase from
the previous year, and other ratios are quite satisfactory. So we can conclude that
Mercantile Bank Limited is performing up to the mark.

6.0 REFERENCES:

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* Annual Report 2008 of Mercantile Bank Limited.
* http://www.mblbd.com

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