While investing in a company, an investor looks at number of factors and indicators which may include net profit, earnings per share, net worth per share, P/E ratio, total assets etc. These indicators may give a view about the financial strength of the company and its future prospects, but the above mentioned indicators fail to assess the efficiency of the company in utilizing its assets and equity.
To check the efficiency, a key indicator is Return on Asset (ROA) which is calculated by dividing net profits with the total asset. It shows the percentage of profit earned by employing the given number of assets. The following is the ROA of commercial banks based on the latest data of Q4 FY 75/76:
The industry average ROA has increased to 1.80% from 1.71% posted in the previous year. The highest ROA has been posted by Agricultural Development Bank (ADBL) at 2.85% while Century Commercial Bank (CCBL) has the lowest ROA of 1.10%. The ROA of NIC Asia Bank (NICA) has improved compared to the previous year while that of Nepal Bank Limited (NBL) has severely fallen.
Similarly, another indicator is the Return on Equity (ROE) which reflects the efficiency of the company in employing its equity to generate returns. It is calculated by dividing the net profits with the total equity employed. The following is the ROE of commercial banks based on the latest data of Q4 FY 75/76:
The industry average ROE has increased to 14.33% from 13.45% posted in the previous year. NIC Asia Bank (NICA) was able to post the highest ROE in the industry at 20.40% which was previously at 10.57%, standing below the industry average. Civil Bank Limited (CBL) has the lowest ROE of 7.42% although it has increased from 6.85% posted in the previous year. The ROE of Nepal Bank Limited (NBL) has fallen from industry leader in ROE in previous year (22.90%) to the bottom three in the current year (8.87%).