Republic of the Philippines

SOUTHERN LEYTE STATE UNIVERSITY SAN JUAN

San Juan, Southern Leyte, Philippines

Name of Student :
Course
:
School Year
:
Instructor:

Lanie D. Brodeth
MM504 Financial Planning and Control
Second Semester, 2015 2016
Mr. Cerenio Adriatico

ABSTRACT
The aims of this research are to examine the applicability of Altman Z
score in determining the financial performance of Security Bank and
Philippine Business Bank being two studied bank institutions between 2013
and 2014. It also tries to use DuPont Analysis to examine whether their
company successes earns a high net profit margin; uses its assets effectively
to generate more sales; and/or it has a high financial leverage.
Between their integral effort with loans, savings, financing and
property investments as reported in the Securities and Exchange
Commission, the researcher inclines to determine sources of management
discussions, inferences or somehow futuristic views given the financial facts
with these two sampling years (2013 2014).
It has been found out that Security Bank and Philippine Business Bank
during its 2013 2014 business performance is not failing or cannot be both
classified as candidate for bankruptcy. They operate a much stable not
failing type of business operation with a relative increase per year. The two
studied banks both has comparable liquid assets in relation to their size of
the company; they conduct comparable profitability that reflects the
company's age and earning power; including its operating efficiency apart
from tax and leveraging factors; in adding market dimension that can show
up security price fluctuation as a possible red flag and sales turnover
On the other hand their performance in terms of return of equity, infers
that Security Bank has high profit margin and find it little lower asset returns
though they are more financially pliable than Philippine Business Bank. The
Philippine Business Bank has very low profit margin but they sale out their
products and services more in numbers as that compared with Security Bank
as shown in their total asset turnover.
INTRODUCTION
Both management of Security Bank Corporation (Security Bank) and
the Philippine Business Bank Inc. A Savings Bank (PBB) are responsible for all

information and representation contained in the financial statements

prepared in conformity with generally accepted accounting principles in the
Philippines and reflect amounts that are based on the best estimates and
informed judgment of management with an appropriate consideration to
materiality. On the other hand the researcher of these two banks is only after
for educational inference purposes as to the merit of its data - no part of its
operations, business statuses and their financial performance is held concern
by this study.
Security Bank known for its financing role in the industrial and top end
businesses and PBB whose reputation of being the quintessential business
bank for the small and medium enterprises (SMEs) are but two banks of two
streams of customer targets in financing. This makes it interesting to
uncover results of Altman Z-scores and DuPont Analysis as a result of
corresponding horizontal and vertical facts for analysis.
Regarding the factuality of data, it is found out that both managements
maintain a system of accounting and reporting which provides for the
necessary internal controls to ensure that transactions are properly
authorized and recorded, assets are safeguarded against unauthorized use
or disposition and liabilities are recognized. The management likewise
discloses to the Banks audit committee and to its external auditor: (i) all
significant deficiencies in the design or operation of internal controls that
could adversely affect its ability to record, process, and report financial data;
(ii) material weaknesses in the internal controls; and (iii) any fraud that
involves management or other employees who exercise significant roles in
internal controls.
The Board of Directors reviews the financial statements before such
statements are approved and submitted to the stockholders of the Bank.
The most prominent SyCip Gorres Velayo & Co., serves as the independent
auditor as appointed by the stockholders, is examining the financial
statements of the Security Bank while Punongbayan & Araullo also the
independent auditor in behalf of the PBB. These entries are signed and
reported in accordance with generally accepted auditing standards in the
Philippines and has expressed its opinion on the fairness of presentation
upon completion of such examination, in its report to the Board of Directors
and stockholders.
However, we remain unbiased as in conjunction with the interest of
treating Altman Z-score since the Philippine Securities and Exchange
Commission of Department of Trade and Industry nor the Bangko Sentral ng
Pilipinas has no white list of low or failing performance banks nor it has
investigatory compilation of bankrupt once, that the researcher held it
neutral to treat according to the findings as the case maybe.

METHOD
The Altman Z score determines the financial performance of Security
Bank and PBB while the DuPont Analysis examines whether their company
success earns a high net profit margin; uses its assets effectively to generate
more sales; and/or it has a high financial leverage
Altman's Z-Score Model (1968)
This model is based on five independent variables, each of them
representing financial ratios and the rates recognized by the dependent
variable (Z). It was developed to complement the model developed by
Altman in 1968. The Altmans Z-Score Method was developed by Dr. Altman
in 1968. It is a multivariate formula to measure the financial health of a
company on whether it will enter into bankruptcy in the forthcoming two
years. This method uses five common business ratios: earnings before
interest and tax (debit)/total assets ratio, sales/total assets ratio, market
value of equity/market value of total liabilities, working capital/total asset
ratio and retained earnings/total assets (Edward, 1968).
The original Altmans Z-score formula was as follows:
Z = 0.012X1 + 0.014 X2 + 0.033X3 + 0.006X4 + 0.010 X5
Where;
Working Capital
X1 =
___________________
Total Assets
Measures liquid assets in relation to the size of the company

X2 =

Retained Earnings
____________________
Total Assets

Measures profitability that reflects the company's age and earning

power
X3 =

Earnings before interest taxes

____________________
Total Assets

Measures operating efficiency apart from tax and leveraging factors, it

recognizes
operating earnings as being important to long-term viability
Market value equity

X4 =

____________________
Book Value of total debt

Adds market dimension that can show up security price fluctuation as a

possible red
flag; and

X5 =

Sales
____________________
Total Assets

For sales turnover (It measures revenue generating ability of a

companys assets)
Z = Overall Index
Edward Altman (1968) was the first to use multivariate analysis to
analyze the ratios of various bankrupt and non bankrupt groups and to look
at the effect of using different combinations of financial ratios to predict
business failures (Mohamed, 1997). Altmans model uses two years
continuous financial results to assess a company's failure.
Table 1: Threshold differentiating a Financial Failure and a Non-Financial
Failure
Company by using Altman Z-score.
Financial Performance
Failure of Company
Non Failure of Company

Altman Z Score
<1.81
>2.99

The threshold of Altman model that was used to determine the

financial status of the two banks studied. Threshold for financial failure was
used to differentiate a Financial Failure and Non Financial Failure Company
using Altman Z-Score. The set of threshold used in to measure the financial
performance in accordance to Cowen and Hoffer (1982), Courtis (1978),
Mohammed (1997), Ali (2008) and Edward (1968).
The DuPont Analysis
The Dupont analysis also called the Dupont model is a financial ratio
based on the return on equity ratio that is used to analyze a company's
ability to increase its return on equity. In other words, this model breaks
down the return on equity ratio to explain how companies can increase their
return for investors.

The Dupont analysis looks at three main components of the ROE ratio.

Profit Margin
Total Asset Turnover
Financial Leverage

Based on these three performances measures the model concludes

that a company can raise its ROE by maintaining a high profit margin,
increasing asset turnover, or leveraging assets more effectively.

The Dupont Corporation developed this analysis in the 1920s. The

name has stuck with it ever since.

Formula

The Dupont Model equates ROE to profit margin, asset turnover, and
financial leverage. The basic formula looks like this.

DuPont Analysis
Return on Equity = Profit Margin x Total Asset Turnover x Financial Leverage

Since each one of these factors is a calculation in and of itself, a more

explanatory formula for this analysis looks like this.

DuPont Analysis
Profit Margin x
Leverage

Total Asset Turnover

Financial

Return on Equity =
Assets

Net Income
Net Sales

Net Sales

Total

Average Total Assets

Total

Equity

This model was developed to analyze ROE and the effects different
business performance measures have on this ratio. So investors are not
looking for large or small output numbers from this model. Instead, they are
looking to analyze what is causing the current ROE. For instance, if investors
are unsatisfied with a low ROE, the management can use this formula to
pinpoint the problem area whether it is a lower profit margin, asset turnover,
or poor financial leveraging.

Once the problem area is found, management can attempt to correct it

or address it with shareholders. Some normal operations lower ROE naturally
and are not a reason for investors to be alarmed. For instance, accelerated
depreciation artificially lowers ROE in the beginning periods. This paper entry
can be pointed out with the Dupont analysis and shouldn't sway an investor's
opinion of the company.

RESULTS AND DISCUSSION

Table 1.0 Results on Altman Z scores of Philippine Business Bank and
Security Bank
Altman Z test Factors

Liquid Assets in relation to

the Size of the Company
(X1 )
Profitability that reflects
the company's age and

Altman
Coefficie
nt

Security Bank
2014 - 2013

.012

Year 2
12.49%

Year 1
12.02%

.014

1.82%

1.46%

Philippine
Business Bank
2014 - 2013
Year 2
Year 1
14.90% 13.83%

1.87%

1.83%

earning power (X2 )

Operating efficiency apart
from tax and leveraging
factors (operating
earnings as being
important to long-term
viability)
(X3 )
Adds market dimension
that can show up security
price fluctuation as a
possible red flag (X4 )
Sales turnover (It
measures revenue
generating ability of a
companys assets) (X5 )
Overall Z index (Z =
0.012X1 + 0.014 X2 +
0.033X3 + 0.006X4 +
0.010 X5)

.033

20.40%

15.93%

17.95%

18.40%

.006

16.53%

14.64%

17.51%

16.10%

.010

18.88%

21.38%

19.56%

18.65%

13.05

11.16

13.34

13.12

(3.61)

(3.34)

(3.65)

(3.62)

By using the table for the threshold for financial failure, it has been
found out that Security Bank and Philippine Business Bank during its 2013
2014 business performance is not failing or cannot be both classified as
candidate for bankruptcy. They operate a much stable not failing type of
business operation with a relative increase per year.
The two studied banks both has comparable liquid assets in relation to
their size of the company; they conduct comparable profitability that reflects
the company's age and earning power; including its operating efficiency
apart from tax and leveraging factors; in adding market dimension that can
show up security price fluctuation as a possible red flag and sales turnover
Table 2.0 Results on DuPont Analysis of Philippine Business Bank and Security
Bank
DuPont Ratios

Profit Margin
Total Asset Turnover
Financial Leverage
Return on Equity (ROE)

Security Bank
Year 2
92.38%
1.48%
831.94%
0.11

Year 1
89.26%
2.17%
828.24%
0.16

Philippine Business
Bank
Year 2
Year 1
18.25%
21.15%
8.59%
9.53%
671.14% 722.98%
0.11
0.15

On the other hand comparing the performance of the two banks with
the factors considered in their return of equity, we may infer that Security
Bank has high profit margin and find it hard for higher asset returns though
they are more financially pliable than Philippine Business Bank.
The Philippine Business Bank has very low profit margin but they sale
out their products and services more in numbers as that compared with
Security Bank as shown in their total asset turnover.