In accounting approach, this repost will choose quick ratio, asset turnover ratio, D/E ratio, D/A ratio, ROA and ROE. In stock market approach, abnormal return and cumulative abnormal return are used to the bank performance in pre-merger and post-merger.
Firstly, Quick ratio is used by this report, because the quick ratio is used to measure the ability of the firm to pay back its short-term liability with its liquid assets (Linda, 2008). If quick ratio is higher, the better condition of the company is indicated. Hence, in bank merger, if quick ratio of the combine bank is higher than acquiring-bank’s, it indicates that the position of the new combined bank has better position, and vice versa.
Secondly, asset turnover ratio is used to measure the amount of sales generated for each dollar’s worth of assets (Steven, 2007). The higher asset ratio indicates that the company has better position. Hence, in bank merger, if the combined bank has higher asset turnover ratio than acquiring-bank, the combined bank has the better position in sales generating for a dollar’s worth of assets, and vice versa.
Thirdly, D/E ratio is used to measure a firm’s financial leverage and it reports the proportion between equity and debt which the firm used its assets to finance (Linda, 2008). A high D/E ratio reports that the company has aggressive in financing and use those financing to its growth. Hence, in bank merger, if the combined bank has higher D/E ratio than the acquiring-bank, the combined bank is thought more aggressive in financing, and vice versa.
Fourthly, D/A ratios is also used to measure the proportion of a firm’s assets are used to finance (Linda, 2008). A higher D/A ratio indicated that the company is higher debt leveraged company. Hence, in bank merger, it can use this ratio to test the combined bank has high leveraged or the acquiring-bank has high leveraged.