This study is examines the empirical relationship and effect between financial ratios and financial performance in Malaysia banking industry. There are many methods are used to measure the bank’s financial performance, financial ratios are one type of methods which is used by company to indicate the fundamental causes underlying a company’s strengths and weaknesses. Financial ratios can be divided into two types which is primary and secondary. Primary which consists of net sale to worth ratio and net income to net sales ratio whereas secondary consists of current assets to current liabilities ratio and current liabilities to net worth ratio. This secondary is used to indicate a company’s financial structure and competitive position. Besides that, financial ratio also consists of leverage ratio, liquidity ratio and profitability ratio. As for the whole, financial ratios such as capital ratios, liquidity ratios, assets and liability portfolio mix and overhead expenses can be defined as an investment that is made by investors on any property asset in order to generate income.
According to Hassan, Ali and Muhammad (2011), they stated that financial ratios can be divided into four categories which are efficiency or profitability ratios, liquidity ratios, capital or leverage ratios and asset quality ratios. Profitability ratios include profit margin ratio, return on asset (ROA) ratio, return on equity (ROE). Liquidity ratios contain quick ratio, current ratio, net working to capital-to-total assets ratio whereas leverage ratios include total debt to total assets ratio, total debt to total equity ratio.
Pouraghajan, Mansourinia, Bagheri, Emamgholipour and Bahareh (2013) studied that financial ratios are used to understand the current and past performance and future prediction of company. Financial ratios also are used as a method for forecasting and monitoring the activities of the company. It can be shown that financial ratios are very important for company because it is used to represent information from the internal state of company and it is able lead investors to invest in the right way. Besides that, they further mentioned that financial ratios can also be used to identify company’s problem, financial strengths and weaknesses. Return on equity (ROE) which is under profitability ratios is more important compared to other ratios from the perspective of investors. This is because it is analytical of their investment returns and lowers this rate in companies cause to reduce earnings per share.
Saleem and Rehman (2011) stated that liquidity ratios among financial ratios are used for liquidity management in every business in the form of current ratio, quick ratio and acid test ratio that significantly effect on...