Analyzing a bank’s report involves using mathematical formulas on liquidity ratios, asset turnover, and leverage ratios. Stakeholders can evaluate the bank’s financial viability and investors can use the data to determine whether to invest in the bank’s stock. Liquidity ratios like the current ratio and cash ratio provide benchmarks for assessing internal finances. Asset turnover reports divide total revenue by total assets to assess efficiency, and leverage ratios like debt ratio and debt-to-equity ratio measure the efficiency of a bank’s operations.
Analyzing a bank’s report involves applying mathematical formulas to institution-specific information. The bank’s financial statements are typically the primary source for the required data. Liquidity ratios and asset turnover are more applicable here, along with some leverage ratios added to the mix. Reports allow a stakeholder to evaluate the financial viability of a bank. Investors can also use data gleaned from a bank’s report analysis to determine whether they want the bank’s stock as an investment vehicle.
Liquidity ratios are often the most common ratios applied to a bank’s financial data. These ratios provide benchmarks for assessing how well a bank is maintaining its internal finances. The current ratio divides current assets by current liabilities. A high current ratio indicates lower risk in the bank because the institution has more assets with which to settle its liabilities. Liabilities include customer deposits and any other claims on the bank’s assets.
An alternative liquidity ratio is the cash ratio, which is also quite applicable in bank ratio analysis. This formula divides the bank’s cash plus marketable securities by its current liabilities. This ratio indicates how much cash the business has to pay off monies owed to other parties.
Asset turnover reports, while a little less common in terms of analyzing a bank’s ratios, can be a primary tool here. Banks use this tool by dividing total revenue by total assets. The result is an efficiency figure that assesses how well the bank uses owned assets to make money for the bank and its invested stakeholders. As is common with most asset turnover ratios, a higher result is typically better as it demonstrates better overall efficiency of the bank.
Leverage ratios are also an informative accounting tool for measuring the efficiency of a bank’s operations. The two most common formulas include the debt ratio and the debt-to-equity ratio. Total debt divided by total assets includes leverage. This indicates how much debt the bank uses to pay for assets. A higher figure here may be a sign that the bank has overleveraged its assets with external debt.
Debt-to-equity replaces total assets as the denominator with total equity in a bank’s ratio analysis. The results indicate how well the bank uses external investment to purchase and use assets. Public banks are the most common users of this report. Over-borrowing isn’t an issue here; don’t use shareholder funds appropriately, however.
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