International Journal of Science and Research (IJSR)

ISSN (Online): 2319-7064

Index Copernicus Value (2013): 6.14 | Impact Factor (2015): 6.391

Evaluating the Financial Performance of Ethiopian

Banks Using Financial Indicators-A Case Study on
Dashen Bank
Teshome Mengstu Mekonen
Lecturer in Adigrat University, Ethiopia, Tigrai, Adigrat, College of Business and Economics, Department of Accounting and Finance

Abstract: The general objective of this study to evaluating financial performance of a Dashen Bank; to conduct this study only a
secondary source of data were used from audited annual financial reports of Dashen Bank from year 2011 to 2015. The collected data
analyzed by using different financial statement ratios to indicate that the financial performance the bank. To measure the financial
performance of the bank; profitability indicator, leverage indicator, activity indicator and other indicator were used. The findings in this
study are in 2015 the bank shows a poor performance as compared to other period (from 2012-2014), the reason is that due to the result
2.9% of return on asset is lowest in 2015 than to other years. The bank is not much loaned up as well as its liquidity is in a good position
and amount of current deposits on hand at the same time. Cash deposit ratio indicated that there is an improvement from year to year.
Therefore, one can conclude that Dashen Bank was better performing from year to year. Dashen bank shows a poor performance in
2014. The reason is that return on equity of 2015 is 23% which is smallest return on equity while comparing to the others years.

Keywords: Dashen, liquidity, profitability, efficiency in utilizing assets, and loan

1. Background of the Study decisions or goals so that they can alter the course and make
changes whenever it is appropriate. With a constant and
Financial statements report both on a firm‟s position at a routine monitoring of performance, underlying problems
point in time and on its operations over some past period, may remain invisible and lead to financial failures further
however, the real value of financial statements lies in the down the line (Mukdad. I, 2015).
fact that they can be used to help predict future earnings and
dividends. From an investor‟s standpoint, predicting the 2. Statement of the Problem
future is what financial statement analysis is all about, while
from management‟s standpoint, financial statement analysis Being one and may be the major category of financial
is useful both to help anticipate future conditions and, more institutions, banks have a very determinant role in the
important, as a starting point for planning actions that will healthy functioning of the economy. Meanwhile,
improve the firm‟s future performance (Brigham, E.L. notwithstanding with its merits, banks can be challenged by
2009). different factors. These include: individual bank
characteristics which could be swayed by the internal
Financial institutions provide means and mechanism of decisions of the management and the board and the wide-
transferring resources from those who have an excess of ranged external factors which are out of the control of the
income over expenditure to those who can make productive banks (Flamini, C., Valentina C., McDonald, G.,Liliana, S.
use of the same. The commercial banks and investment (2009) as citied by Muhabie M., (2015)).
institutions mobilize savings of people and Channel/
intermediate them into productive uses. Financial Consequently, to evaluate banks‟ performance, we can use
institutions provide all type of assistant required different methods. These methods can be classified in three
infrastructural facilities institutions, economic persons who ways: The traditional method of financial indices based on
can take the development in the following ways: providing balance sheet and income statement analysis, parametric
funds, infrastructural facilities, and promotional activities, methods based on the knowledge of production function and
development of backward areas, planned development, non-parametric methods that do not require production
accelerating industrialization, and employment generation function (Van Horne, J., and Wachowicz, John, 2005 as
(Frederic, S.M. 2004). cited by Abdi, N., (2010)).

A commercial bank‟s performance is evaluated for several The performance evaluation of companies is essential to
reasons depending on personal objectives. An entity like a provide information about company's operating performance
bank regulator, such as may need to identify and call and its net worth. Knowing organization‟s competitiveness
attention to banks that are experiencing chronic financial and potentials of the business through financial statement
problems in order that they may fix them before they get out analysis is useful for decision making for users of financial
of control. This is the case with so called “bank runs.” statement information, including managers, creditors,
Shareholders, on the other hand need to assess which banks stockholders, potential investors, and regulatory agencies.
they can deem suitable to financially invest in. With the objective of mobilizing resources and enhancing
Unsurprisingly, commercial banks evaluate their own investments, financial institutions have irreplaceable roles in
performance over a given period so that they may determine economic development of a country.
the efficacy and long term viability of management
Volume 5 Issue 6, June 2016
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Paper ID: NOV164552 DOI: 10.21275/v5i7.NOV164552 1347
 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2015): 6.391
Although some studies might have been made before some 4.2. Method of Data Analysis and Presentation
years in relation to the financial performance analysis in
different banks, the time/year gap itself shows the bank to The collected data was organized in using percentage and
have different performance. Here in this study as to the tables to make it easy to analyze and interpret it. In this
researcher knowledge, there is no research conducted which section of the research is mainly focused in data analysis and
is published and unpublished in evaluating the financial interpretation from the data collected using the audited
performance of Ethiopian banks using financial indicators in annual financial reports of Dashen bank from year 2011 to
recent years data in the case of Dashen bank through a 2015.
descriptive way of research design.
5. Data Analysis, Discussion and Interpretation
Research Questions
1) What does seem the trend of Dashen bank in its 5.1. Introduction
profitability in recent years?
2) Is that good enough the its debt utilization within recent In this part the data which is a secondary collected from
years? website audited annual financial report of Dashen Bank.
3) Does the Dashen bank utilizing its assets efficiently Therefore, the data analyzed, discussed and indicated based
manner in recent years? up on the specific objectives that are stated in above and it is
4) Does the bank capable enough to pay its current selected financial performance indicators which a sensitive
obligation in recent years? for affecting of Dashen bank..
5) What are financial strength and weakness of the bank?
5.2. Liquidity Indicators
3. General Objective
Liquidity ratio is indicated on the relationship between the
The general objective of the study is to evaluating the current asset and current liability of the organization or it is
financial performance of Ethiopian banks: using financial a group of ratio that allows one to the firm‟s ability to pay of
indicators in the case of Dashen bank. short term obligation as they become due. The higher
liquidity ratio, the higher capacity pays in short term
3.1. Specific Objective obligations and vice versa (Brigham, E.L. 2009).

1) To determine the trends of Dashen Bank in its With regard to the current and quick ratio the bank the
profitability in recent years. researcher tried to see it but the bank performs a good within
2) To evaluate the financial performance of Deshen Bank that consecutive years. But here presented is among the
using debt ratio. various liquidity measures that study uses the following two
3) To find out whether the bank utilizing its asset efficiently liquidity ratios.
in recent years?
4) To assess the bank whether it is capable enough to pay its Table 3.1: Liquidity Ratio
current obligation in recent years? Ratio/year 2011 2012 2013 2014 2015
5) To analyze and compare the financial strengths and Loan to asset (LAR) 41.7% 45.4% 43.8% 42.9% 45.7%
weakness of the Dashen bank. Cash to deposit (CDR) 14.2% 18.5% 22.6% 27.8% 39.6%
(Source; audited annual report of Dashen bank)
4. Research Methodology
The loan to asset ratio trend of Dashen bank from 2011 to
This study is a historical research based on case study 2015 indicated that mix of ups and downs. The deviation
approach. In any types of research study, the methodology to ranges between 45.7% in 2015 and 41.7% in 2011. This is
be pursued is decided by the nature of more specifically by unstable drift of loan to asset; therefore, this implied that the
the research objectives. Here in this case study, the bank was not in a stable financial position. As the table and
methodology is based upon a descriptive way of approach. A figure indicates the bank‟s loan to asset is below 50% in all
descriptive approach is a technique used to organize and years of the study. Hence, one can conclude that the bank is
summarized a set of data in concise way; helps to identify not much loaned up even though its liquidity is in a good
the general features and trends in a set of data and extracting position and amount of current deposits on hand at the same
useful information; and also it is very important in time.
conveying the final results of a study (Creswell, J W 2003).
5.3. Profitability Indicators
4.1. Sources of Data & Methods of Data Collections
Profitability Ration: are calculated to measure the operating
In conducting this study only secondary data source were efficiency of the company. Besides managements of the
used to address the evaluating financial performance of a company, creators and owners are also interested in the
Dashen bank: using financial indicators through financial profitability of the firm. Creditors want to get interest and
statement, which is collected from annual financial repayment of principal regularly owners wants to get a
statement report from the year of 2011 – 2015 of Dashen required rate of return on their investment. This is possible
bank website. only when the company earns enough profits. Profit can be
measured in various ways. Gross profit is the difference
between sales and the manufacturing cost of goods sold. A
Volume 5 Issue 7, July 2016
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Licensed Under Creative Commons Attribution CC BY
Paper ID: NOV164552 DOI: 10.21275/v5i7.NOV164552 1348
 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2015): 6.391
number of companies define gross profit differently. They Return on asset refers to what earning was generated from
define it as earnings before depreciation, interests and taxes. the invested assets. Return on asset gives an idea as how
The most common measures of profit are profit after tax or efficient management is at using its assets to generate profit.
net income which is a result of the impact of all factors on Sometimes return on asset is refers to as Return on
the firm‟s earnings (Brigham, E.L. 2009). investment (ROI) (Van H. J., and Wachowicz, J., 2005).

5.3.1. Return on Asset

Table 3.2: Return on asset

Year 2011 2012 2013 2014 2015
Net income after tax 450,655,361 652,012,122 606,756,384 712,484,276 729,133,970
Total asset 14,614,795,156 17,520,042,319 19,747,174,767 21,962,202,063 24,763,885,516
ROA 3.08% 3.72% 3.07% 3.24% 2.9%
(Source; annual report of Dashen bank)

As it can be seen in the above table 3.2 Dashen bank shows 5.3.2. Return on equity
a good performance in 2012 than of the other year. But, here Return on equity is the amount of net income after tax as
in 2015 the bank shows a poor performance as compared to percentage of shareholders equity. Return on equity
other period (from 2012-2014). The reason is that the result measures company profitability‟s with the money
2.9% of return on asset is lowest result comparing to other shareholders have invested (Brigham, E.L. 2009).
years, the bank should be arranging an assessment other
investigation on it.

Table 3.3: Return on equity

Year 2011 2012 2013 2014 2015
Net income after tax 450,655,361 652,012,122 606,756,384 712,484,276 729,133,970
Shareholders‟ equity 1,396,402,276 1,827,893,695 2,045,698,696 2,597,625,196 2,923,893,980
ROE 32.27% 35.67% 29.66% 27.43% 23%
(Source; annual report of Dashen bank)

The above table shows that the bank performing a good institution with higher debt ratio may high expected return
performance in 2012, because in this year it achieve 35.67% when the company‟s economy is in normal condition but
return on equity. But Dashen bank shows a poor they are exposed to risk of loss when the economy goes in to
performance in 2014 and 2015; which is the return on recession (Brigham, E.L. 2009).
equity in 2015 is 23% that is the smallest return on equity
compared to others years. 5.4.1. Debt Ratio
It is a financial ratio measures the proportion of both long
5.4. Debt Utilization term and current debts with total assets. This debt ratio
indicates the ability of the firm to meet its liability with its
This ratio shows the extent to which the institution uses debt total asset (Brigham, E.L. 2009).
financing on its capital structure. High debt ratio results a
lower profit after interest and tax amount. Any business

Table 3.4: Debt ratio

Year 2011 2012 2013 2014 2015
Total liability 13,218,392,885 15,692.148,624 17,701,476,071 19,364,576,867 21,839,991,536
Total asset 14,614,795,156 17,520,042,319 19,747,174,767 21,962,202,063 24,763,885,516
Debt to ratio 90.4% 89.6% 89.6% 88.2% 88.2%
(Source; annual report of Dashen bank)
In the above table 3.4; the debt ratios analysis shows that a 5.5. Asset Utilization
reduction of debit from year to year. This may cause
reduction on depositing deposit by the clients. The reason Activity ratios are directly linked with the route of the
behind since the bank serves as intermediate between the business revenue. The efficiency is measured in terms of
surplus unit with deficit unit the amount of deposited will be generation of revenue by respective current, fixed and total
considered as a loan by the surplus unit, therefore, there is a assets (Brigham, E.L. 2009).
reduction of depositing and profit might be that, as debt
paid, the amount of interest expense will be higher and the 5.5.1. Total asset turnover
profit after tax will be decline.

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Paper ID: NOV164552 DOI: 10.21275/v5i7.NOV164552 1349
 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Index Copernicus Value (2013): 6.14 | Impact Factor (2015): 6.391
Table 3.4: Total asset turnover
Year 2011 2012 2013 2014 2015
Income 450,655,361 652,012,122 606,756,384 712,484,276 729,133,970
Current asset 14,614,795,156 17,520,042,319 19,747,174,767 21,962,202,063 24,763,885,516
TATO 3% 3.7% 3% 3.2% 3%
(Source; annual report of Dashen bank)

In the above table 3.4.the result of Dashen bank‟s total asset the bank should study in detail the reason the shows
turnover ratios up and down and that Dashen bank‟s income declining the return on equity from year 2014-2015.
of the company from year to year also therefore this table  Since the bank is not much loaned up and its liquidity is
shows that a fluctuation in to total asset turnover ratio. The in a good position and amount of current deposits on
Dashen bank to become strong in generating higher Birr hand at the same time. Therefore, the bank should keep
amount should more in investment in plant asset and current the liquidity is in a good position and amount of current
asset together. Generally the amount of income in all 5 deposits on hand at the same time
years, it is lower than the total asset invested with in the 5  The in Cash deposit ratio has shown a there is an
years and this makes the ratio to be still low in relation to the improvement from year to year. Therefore, one can
total asset. conclude that Dashen Bank was better in the from year to
year, so the bank should keep on it.
6. Conclusion  Total asset turnover the amount of income in all 5 years,
it is lower than the total asset invested with in the 5 years
Performance evaluation is essential for an organization. The and this makes the ratio to be still low, which is less than
effectiveness of an organization is measured through the one and the debt ratios analysis shows a reduction of
assessment of performance and the result found can be a debit from year to year. This also similar with return on
base for solution of the existing problem, future expansion, equity that need the bank examine critically the income
improvement of quality of work and overall development. that generating in relation to total asset that have.
Therefore, its major purpose is to improve profit
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 Dashen bank shows a poor performance in 2015. The
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smallest return on equity compared to others years. Here

Volume 5 Issue 7, July 2016

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Licensed Under Creative Commons Attribution CC BY
Paper ID: NOV164552 DOI: 10.21275/v5i7.NOV164552 1350