Profitability ratios are used to assess the ability of the business to generate earnings in
comparison with all expenses and costs doing business. Profitability ratios are generally
considered to be the basic bank financial ratio in order to evaluate how well a bank is
performing in terms of profit. For most part if a profitability ratio is relatively higher
compared to the competitors, industry averages or previous years, then it is taken as
indicator of better performance of the bank. Liquidity ratios indicate the ability of the firm
to meet recurring financial obligations. Liquidity is important for a firm to avoid
defaulting on its financial obligations and thus avoid financial distress. Bank can get into
liquidity problem especially when withdrawals exceed new deposits significantly over a
short period of time.
Risk and solvency ratios determine the probability that the firm will become unable to
fulfill its contractual obligations. For banks, whether Islamic or conventional, deposits
constitute a major liability. To gauge risk and solvency of banks the study used debt to
equity and debt to total assets ratios. Efficiency ratios indicate the overall effectiveness of
the firm in utilizing its assets to generate sales. Fligher values of these ratios are good
indications of the firm doing well.