Risk Analysis of Goldman Sachs
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Transcript of Risk Analysis of Goldman Sachs
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.