Executive Summary

This financial analysis of ‘The Goldman Sachs Group Inc’ is a term project for the course

Working Capital Management. It’s a competitive in the financial industry’s scene in

United States of America. We have analyzed the company’s performance over a 3 years

period and compared it to another bank ‘Prime Bank Ltd’. Afterwards, we have figured

the intrinsic value of the stock of the bank and through valuation method and technical

analysis provided recommendation for the investors.

We tried to gather information’s as much as we can. We checked annual reports of both

financial institutions. We tried our level best to compare the situations of both banks. We

performed trend analysis and graphically presented each of the ratios we calculated. We

compared three years’ timeline.

Based on our analysis, we came up with a conclusion whether Prime Bank is at a risk of

getting bankrupt in future.

Literature Review

Time Series Analysis:

Time Series analysis evaluates the performance of the company overtime. In this method

different ratios are used to make comparison of current to past performance.

Cross Sectional Analysis:

Cross sectional analysis involves the comparison of different company’s financial ratios at

the same point in time. How well a company has performed in the relation to other

company can be measured by comparing the ratio values to those companies.

Ratios:

Profitability ratios:

1. ROE: Return on equity is a measure of how efficiently the company is using its

equity to generate profit. The formula is-

Net Income/Common Equity

2. ROA: It is a good indicator of how efficiently the company is using its asset to

generate profit. The formula is-

Net Income/Total Assets

3. Net profit margin: It is an indicator of effectiveness of expense management (cost

control) and service pricing policies. The formula is-

Net Income/Revenues

4. Net Interest Margin: Net interest margin measures how large a spread between

interest income and interest costs management has been able to achieve by close

control over total assets. The formula is-

(Int. Income-Int. Exp)/Total Assets

5. Net Non-interest margin: Net non-interest margin measures how large a spread

between non-interest income and non-interest costs management has been able

to achieve by close control over total assets. The formula is-

(Non Int. Income-Non Int. Exp)/Total Assets

6. Net Operating margin: Its shows how much does the firm generate net worth

against investing in assets. The formula is-

(Total operating revenue-Total Operating Exp)/Total Assets

7. Asset Utilization: Also known as asset management efficiency. It is a good

indicator of portfolio management policies, especially the mix and yields on the

bank’s assets. The formula is-

Total Op. Revenues/Total Assets

8. Tax Mgt. Efficiency: It shows how efficiently the firm does manage its taxes with

net operating income. The formula is-

Net Income/ Net Operating Income before tax

9. Expense Control Efficiency: It shows how efficiently the firm does manage its

expense with its revenues. The formula is-

Net operating income before taxes/total operating revenues

10. EPS: EPS measures how much the firm earns against every common share. The

formula is- Net Income after tax/ Common Equity Shares outstanding

11. Equity Multiplier: It is a good indicator of leverage or financing policies, the

sources chosen to fund the bank (debt or equity). The formula is-

Total Assets/Total Equity Capital

Efficiency ratios:

1. Operating Efficiency ratio: It shows how much operating expenses a company is

incurring and by incurring those it is generating revenues. The formula is-

Total Operating Exp/ Total Operating Revenues

2. Employee productivity ratio: It actually measures the contribution of each

employee in firm’s earnings. The formula is-

Net Operating Income/ Number of full time employees

3. ROA: It is a good indicator of how efficiently the company is using its asset to

generate profit. The formula is- Net Income/Total Assets

4. Asset utilization ratio: Also known as asset management efficiency. It is a good

indicator of portfolio management policies, especially the mix and yields on the

bank’s assets. The formula is-

Total revenue/Total asset

Market position ratios:

1. Dividend Payout Ratio: It shows what portion of net income given to the

shareholders as dividend. The formula is- Dividend Paid/ Net Income

2. Dividend yield ratio: The formula for dividend yield ratio is- (DPS/Current market

price of the share) *100

3. P/E ratio: P/E ratio indicates- to get additional benefit, the investors are paying

how much. If P/E ratio goes up the growth potential raises up and so does

investor’s confidence. The formula is- Market price of share/EPS

4. Market book ratio: This ratio indicates whether the share is overpriced or

underpriced. If it is overpriced, the market is ready to pay more for the stock

because the additional value created in the market for good performance. If it is

underpriced, the market is not ready to pay more for the stock. The formula is-

market price of the stock/book value per stock

LIQUIDITY RATIOS:

1. Cash position indicator: This ratio indicates cash. Higher the ratio, better the

liquidity position. The formula for the ratio is- cash and deposits due from

depository institution/total asset

2. Liquid securities indicator: Marketable securities are more liquid. Government

securities are one of the good examples of marketable securities. The formula for

the ratio is- Gov. securities/total asset

3. Net federal fund position: The formula for Net Fed. Fund position is the

difference between Fed. Funds sold and Fed. Funds purchased divided by Total

Asset.

4. (Fed. Funds sold – Fed. Funds purchased)/Total Asset

5. Capacity ratio: This ratio is a negative liquidity ratio. The formula for the ratio is-

Net loans and losses/ Total Asset

6. Pledged securities ratio: Pledged securities are those securities that banks used

as collateral. This ratio is also a negative liquidity ratio. The formula for the ratio

is- Pledged securities/Total Securities holdings

7. Hot money ratio: Hot money asset are money market (short term and very liquid)

instruments. The formula for the ratio is- Money market asset/ Money market

liabilities

8. Deposit brokerage index: Liquidity requirement is very high as the probability of

withdrawn of brokered deposits is high. The formula for this ratio is- Brokered

deposits/Total Deposits

9. Core deposit ratio: Core deposits are those accounts where small amount of

money is deposited. The formula to calculate core deposit ratio is- Core

deposits/Total Assets

10. Deposit composition ratio: The formula for deposit composition ratio is-

Demand Deposits/Time Deposits

11. Loan Commitment Ratio: This is another negative liquidity ratio. Unused loan

commitments are off balance sheet items. The formula for this ratio is- Unused

Loan commitment/Total Assets

LEVERAGE RATIO:

1. Debt ratio: It is a simple measure of total liability to total asset ratio. The formula

is- Total liability/Total assets

2. Debt to equity ratio: The formula for debt to equity ratio is- Long-term

debt/Equity capital

Company overview

Prime Bank

In the backdrop of economic liberalization and financial sector reforms, a group of highly

successful local entrepreneurs conceived an idea of floating a commercial bank with

different outlook. For them, it was competence, excellence and consistent delivery of

reliable service with superior value products. Accordingly, Prime Bank Ltd. was created

and commencement of business started on 17th April 1995. The sponsors are reputed

personalities in the field of trade and commerce and their stake ranges from shipping to

textile and finance to energy etc. As a fully licensed commercial bank, Prime Bank Ltd. is

being managed by a highly professional and dedicated team with long experience in

banking. They constantly focus on understanding and anticipating customer needs. As

the banking scenario undergoes changes so is the bank and it repositions itself in the

changed market condition.

Prime Bank Ltd. offers all kinds of Commercial Corporate and Personal Banking services

covering all segments of society within the framework of Banking Company Act and rules

and regulations laid down by our central bank. Diversification of products and services

include Corporate Banking, Retail Banking and Consumer Banking right from industry to

agriculture, and real state to software.

Prime Bank Ltd., since its beginning has attached more importance in technology

integration. In order to retain competitive edge, investment in technology is always a top

agenda and under constant focus. Keeping the network within a reasonable limit, our

strategy is to serve the customers through capacity building across multi delivery

channels. Our past performance gives an indication of our strength. We are better placed

and poised to take our customers through fast changing times and enable them compete

more effectively in the market they operate.

Goldman Sachs

The Goldman Sachs Group, Inc. is an American investment banking and securities firm

that engages in global investment banking, securities, investment management, and

other financial services primarily with institutional clients. Goldman Sachs was founded in

1869 and is headquartered at 200 West Street in the Lower Manhattan area of New York

City, with additional offices in major international financial centers. The firm provides

mergers and acquisitions advice, underwriting services, asset management, and prime

brokerage to its clients, which include corporations, governments and individuals. The

firm also engages in proprietary trading and private equity deals, and is a primary dealer

in the United States Treasury security market.

As of 2009, Goldman Sachs employed 31,701 people worldwide. In 2006, the firm

reported earnings of US$9.34 billion and record earnings per share of $19.69. It was

reported that the average total compensation per employee in 2006 was

US$622,000. However, this number represents the arithmetic mean of total

compensation and is highly skewed upwards as several hundred of the top recipients

command the majority of the Bonus Pools, leaving the median that most employees

receive well below this number. In Business Week's recent release of the Best Places to

Launch a Career 2008, Goldman Sachs was ranked #4 out of 119 total companies on the

list. Goldman Sachs is divided into three businesses units, Investment Banking, Trading

and Principal Investments, and Asset Management and Securities Services.

Despite of world financial crisis in 2008 Goldman Sachs was able to gain profit during

that time. This can be referred as a positive sign for the companies risk management.

Goldman Sachs successfully overcomes the risk.

Research Methodology

For different aspects of analysis, different tools have been used in the paper. They are –

Fundamental analysis for evaluating company’s performance has been used and the

analysis horizon was from the year 2007 to 2009. The analysis mainly involved ratios,

which have been analyzed through time-series analysis and also cross-sectional analysis

with Dutch-Bangla Bank Limited. The ratios were from the following 5 categories:

Profitability Ratio

Efficiency Ratio

Liquidity Ratio

Debt Ratio

Market Ratio

For intrinsic valuation of the company’s share, Dividend Growth Model has been

used. The average historic growth in Dividend per Share has been taken as the

constant growth in future dividends. The formula used to find price of the stock

was –

P0 = D1/(k – g), where k = WACC, g = growth rate, P0 = Price and D1 = Expected

Dividend in the next year.

For the final recommendation on whether to invest in the company’s stock or not,

technical analysis using the Moving Average of Convergence and Divergence has

been used.

Limitations

While doing the report our group had to face some limitation. The main factors that

hampered the complete flawlessness of the report are-

Unavailability of Information:

The main limitations of the report caused due to the unavailability of the information. As

our report is based on the financial situation 3 year, we had to collect the 3-year’s annual

report for both the companies from different places and web-sites. Besides, after

collecting the financial reports we did not found many information as the companies do

not publish all internal information. Therefore while analyzing because of the shortage of

data some prediction or analysis may not be accurate.

Limitations of Theories

In Some cases, the theories of ratios could not give a proper solution. These limitations of

theories are

A Single ratio is never sufficient from which to judge the overall performance of

the firm.

If dates for the calculations of ratios are not the same, they might end up with

seasonality error and show false result.

The reliability of the financial statements might be questionable as per if not used

an audited copy.

The differing data must be compared in the same way; else the comparison will

not show the right results as they should.

Results can be distorted by inflation.

Financial Analysis

Financial performance of Goldman Sachs:

The one review of stock performance of Goldman Sachs is given below

In the year 2008 the price started to fall and was ups and downs but at September 2008

the price of the stock went lowest realizing about $55 then the company started to grow

again in 2009 now although the situation has improved Goldman Sachs still suffers from

stock price volatility. Economic situation is not stable over there. But we think it is

recovering faster.

Ratio Analysis

Ratio analysis is the most effective way to determine any company’s financial position.

Each numbers in the ratio has some inherent meaning. For determining and comparing

the financial condition of these two banks we used some ratio. We tried our best to

determine from our knowledge.

The ratios we used are:

Liquidity Ratio

Debt Ratio

Profitability

Market

We used these four types of ratio in order to determine the company’s position. We

didn’t use turnover ratios because as a bank doesn’t hold inventories or sales. The

calculated ratios for the two banks “Prime Bank Limited” & “Goldman Sachs” are given in

the following pages.

Liquidity Ratio:

Current Ratio:

The Current Ratio is one of the most commonly cited financial ratios. It measures the

firm’s ability to meet its short term obligations. Generally, the higher the Current Ratio,

the more liquid the firm is considered to be.

In the year 2007, Prime Bank had current assets 1.14 times higher than current liabilities.

In the year 2008, Prime Bank Ltd had current assets 1.13 times higher than current

liabilities.

Again, from the year 2007 to 2008 the ratio had decreased i.e. the performance of Prime

Bank Ltd had declined.

From 2007 to 2008 the ratio had gone down because the relative increase in current

liabilities was higher than relative increase in current assets.

Prime Bank Limited

Ratio Name/Year 2007 2008 2009 2010

Current Ratio 1.14 1.13 1.15 1.13

Quick Ratio 1.14 1.13 1.15 1.13

Goldman Sachs

Items Years

2007 2008 2009 2010

Current Ratio (CA/CL) 0.275622 0.521152 0.490405 1.4

Quick Ratio [(CA-Inventory)/CL] 0.275622 0.521152 0.490405 0.45

Interpretations:

In the year 2007, Prime Bank LTD had current assets 1.14 times higher than

current liabilities while Goldman Sachs had 0.27.

1.12

1.125

1.13

1.135

1.14

1.145

1.15

1.155

2007 2008 2009 2010

Current Ratio (Prime Bank)

Series 1

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2007 2008 2009 2010

Current Ratio (GS)

Current Ratio (GS)

In the year 2008, Prime Bank Ltd had current assets 1.13 times higher than

current liabilities and Goldman Sachs had around 0.53. From the year 2007 to

2008 the ratio had decreased i.e. the performance of Prime Bank Ltd had declined

but Goldman’s ratio increased.

From 2008 to 2009 Prime Bank Ltd’s ratio had gone but again GOLDMAN SACHS

ratio also went down because of relative increase in liabilities.

Quick Ratio or Acid Test Ratio -

The Quick Ratio or Acid Test Ratio is similar to the current ratio except that it excludes

inventory, which is generally the least liquid current asset. The quick ratio provides a

better measure of overall liquidity only when a firm’s inventory cannot be easily

converted into cash. If inventory is liquid, the current ratio is an overall measure of

overall liquidity.

Quick Ratio

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2007 2008 2009 2010

Prime Bank

Goldman Sachs

Interpretations:

In the year 2007, PRIME BANK LTD had current assets excluding inventory 1.14

times higher than current liabilities. In the year 2008, PRIME BANK LTD had

current assets excluding inventory 1.13 times higher than current liabilities well

GS was struggling at 0.27

From the year 2007 to 2008 the ratio had decreased i.e. the performance of

PRIME BANK LTD had declined but GS performance increased

From 2008 to 2009 the ratio had gone down because the relative increase in

current liabilities was higher than relative increase in current assets excluding

inventory.

To illustrate the gaps between these two charts we can say that the quick ratio of Prim

Bank is higher because Goldman Sachs use huge amount of current liabilities that causing

to reduce it’s quick ratio much less than Prime Bank.

Leverage Ratio

Goldman Sachs

Items 2009 Years 2007

2007 2008 2009 2010

Debt Ratio = Total Debt / Total Asset (x or %) 1.503582 1.501547 1.53636 0.92

Long Term Debt Ratio = Long Term Debt / Total

Asset (x or %)

0.230758 0.30797 0.365391 0.61

Debt Equity Ratio = Total Liability / Total

Equity (x or %)

24.99371 12.74182 11.00529 10.7501

TIE Ratio = EBIT / Interest Charges (x or %) 2.708308 0.359385 3.050615 7.116

Prime Bank Limited

Items Years

2007 2008 2009 2010

Debt Ratio = Total Debt / Total Asset (x or %) 0.9338 0.9393 0.9056 0.90

Long Term Debt Ratio = Long Term Debt /

Total Asset (x or %)

0.78 0.72 0.68 0.69

Debt Equity Ratio = Total Liability / Total

Equity (x or %)

14.11 15.47 9.59 8.72

TIE Ratio = EBIT / Interest Charges (x or %) 1.14 1.01 1.13 1.74

Debt Ratio

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2007 2008 2009 2010

Goldman Sachs

Prime Bank Ltd

If we look at Goldman Sachs the company’s debt-asset increased this is a bad sign

because the company have much liability. It happened because of financial crisis they

faced. The company will do better in future we hope that. On the other hand Prime Bank

also has a Debt Ratio just near 1 indicating it has just enough assets to cover its total

debts.

Profitability Ratio

Prime Bank Ltd. Years

Ratio Name 2007 2008 2009 2010

Basic Earning power 0.041 0035 0.040 0.042

Return On Assets 1.76% 1.13% 2.26% 0.024

Return On Equity 26.55% 18.62% 23.93% 0.209

Goldman Sachs

Items Years

2007 2008 2009 2010

Basic Earning Power (BEP) = EBIT / TA

(x or %)

0.024744 0.004277 0.039146 0.043

Return on Asset = Net Income / Total

Asset (x or %)

0.016303 0.004251 0.026424 0.043

Return On Equity = Net Income / Total

Equity (x or %)

0.271005 0.036073 0.189284 0.108

Return on Equity

During the analysis horizon, Prime Bank has always enjoyed higher return on equity

except in 2008 the ROE went down to below 20%. The reason was a decrease in the

bank’s net profit even after having a good growth in their Interest Income to 9 billion

from 7 billion. This indicates the overall increase in the bank’s expenses.

The return on equity of Goldman Sachs had been fluctuated throughout the years. The

reason behind this is unstable net profit due to failure to recover the loans.

Market Ratios:

Goldman Sachs:

2010

2009 2008 2007

Items/Year 2007 2008 2009 2010

0

0.05

0.1

0.15

0.2

0.25

0.3

2007 2008 2009 2010

Prime Bank

Goldman Sachs

Earning Per Share = Net Income / Shares

Outstanding (Tk/share)

13.18

10.76 29.66496 25.025974

Book Value per Share (BVPS) = Total Equity

/ SOS (TK/share)

152.42 137.3087 139.3268 109.4629

P/E 12.21 15.3 6.88 7.87566

Prime Bank Limited:

Ratio

Name/Year

2007 2008 2009 2010

Earnings Per

Share (EPS)

Tk.61.57/share Tk.43.32/share Tk.78.33/share 83.47

P/E Ratio 15.01 12.47 8.34 14.69

Book Value Per

share

231.78 235.48 330.38 287.86

P/E Ratio:

The P/E ratio is commonly used to assess the owner’s appraisal of share value. The P/E

ratio measures the amount that investors are willing to pay for each dollar of a firms

earning. The higher the ratio the better it is. P/E ratio indicates- to get additional benefit,

the investors are paying how much. If P/E ratio goes up the growth potential raises up

and so does investor’s confidence.

Interpretations:

In 2007, 2008, 2009 and 2010 the shareholders of Prime Bank were willing to pay

Tk.15.01, Tk.12.47, Tk. 8.34, and Tk. 14.69 respectively per each dollar of reported

earnings.

0

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010

Goldman Sachs(P/E)

Goldman Sachs(P/E)

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010

Prime Bank(P/E)

Prime Bank(P/E)

In 2007, 2008, 2009 and 2010 the shareholders of Goldman Sachs were willing to

pay Tk.7.87566, Tk.6.88, Tk. 15.3 and Tk. 12.21 respectively per each dollar of

reported earnings.

The reason for lower P/E is higher EPS. In 2008 Goldman Sachs has lower P/E than

the other years. The reason behind this is the company exhibits higher EPS during

this year.

Prime Bank has a good P/E than that of Goldman Sachs except for year 2009.

Book value per Share:

BVPS estimates the total value of per share currently holding and declared by the

company.

0

20

40

60

80

100

120

140

160

180

2007 2008 2009 2010

Book value per share(GS)

Book value per share(GS)

Interpretations:

Book value per share of the Goldman Sachs increased from the year 2007 to 2008

and this is because of trying to hold shares more tightly, but a slight dip in 2009

and again a rise in 2010.

If we try to interpret the book value per share of Prime bank, it increased

continuously during the period of analysis except for year 2010. A slight dip is

seen in year 2010 than that of year 2009.

Both the company should have tight control over these stuffs.

Capacity Ratio:

Prime Bank:

Year 2007 2008 2009 2010

Capacity ratio .73 .68 .72 .76

0

50

100

150

200

250

300

350

2007 2008 2009 2010

Book value per share(Prime bank)

Prime bank(BVPS)

Goldman Sachs:

As the net loans and leases are zero for 2007 to 2010, capacity ratio for Goldman Sachs is

zero. This indicates the net loan and lease is zero for Goldman Sachs. So there is no

liquidity requirement for Goldman Sachs.

Interpretation:

Capacity ratio indicates the amount of loans and leases’ contribution in the total asset. In

this regard, the figures show that except a slight dip in 2008, the ratio is pretty stable

around the other years.

64%

66%

68%

70%

72%

74%

76%

78%

2007 2008 2009 2010

capacity ratio(prime bank)

capacity ratio(prime bank)

Current liquidity Index:

Current liquidity index is the summation of cash assets and cash flow from operations in

the numerator divided by current liabilities. Such a ratio, when it decreases over time,

signals potential liquidity problems. So it is better to have a higher current liquidity index

ratio.

Goldman Sachs:

Year 2007 2008 2009 2010

CLI .11 .058 .78 .31

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2007 2008 2009 2010

CLI(GS)

CLI(Prime Bank)

Prime Bank

Year 2007 2008 2009 2010

CLI 0.0596 0.0529 0.70 .0375

Interpretation:

Current liquidity index signals potential liquidity crisis and according to the

analysis the company faces liquidity problems throughout the year.

Current liquidity index was lowest in 2008 (Goldman Sachs), which is very low

compare to other years

In 2009, CLI was highest though it is very small than Prime Bank.

In 2010, CLI of Goldman Sachs is again lessened than the year of 2009.

The above all criteria states that Goldman Sachs faces liquidity problem through

out the year of our analysis horizon.

Cash Position Indicator:

This ratio indicates cash. Higher the ratio, better the liquidity position. The formula for

the ratio is- cash and deposits due from depository institution/total asset

The company is very stable in terms of maintaining liquidity when it comes to holding

cash assets. Throughout 2007-2010 it has managed to maintain a cash to total asset ratio

around the same figure.

Goldman Sachs:

Year 2007 2008 2009 2010

Cash position

indicator

.011 .010 .014 .018

Prime Bank:

Year 2007 2008 2009 2010

Cash position

Indicator

.07 .07 .08 .086

0

0.002

0.004

0.006

0.008

0.01

0.012

0.014

0.016

0.018

0.02

2007 2008 2009 2010

Cash position indicator (GS)

Cash position indicator (GS)

Interpretation:

Cash position indicator for both the banks has been stable. But for most of the year

Prime Bank’s cash position has been better. Prime bank has picked up their cash position

in 2010 and exceeded Goldman Sachs in every year. The Cash position Indicator for

Goldman Sachs is also better in 2010.

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.1

2007 2008 2009 2010

Cash position indicator (Prime bank)

Cash position indicator (Primebank)

Conclusion

In the end we found that there is no inconclusive result about which bank is in a better

position. Because both banks have many financial positions very similar. In some cases

like P/E ratio Goldman Sachs is performing better than Prime Bank in other case like

capacity ratio Prime bank is performing is working much better than the previous one.

Both banks have potentials but if they don’t concentrate on their short term financing it

is very likely that both of the banks may needed government intervention to recover

from the situation created by on their own faults.