The Cooke ratio measures a bank’s capital against its risky assets to determine its protection against risk. It was replaced in 2006 by the McDonagh ratio, which allows banks to adjust the rating of individual assets based on the borrower’s risk. The Cooke ratio is a way of calculating how much capital a bank has […]
Ratio analysis is used in accounting, finance, and marketing to make informed decisions and forecasts. It breaks down data into ratios to compare and track success, but there are limitations to using ratios. Standard ratios are used for specific tasks, but analysts must understand their importance to avoid false assumptions. Precautions should be taken before […]
The renin-aldosterone ratio is used to diagnose high blood pressure and can indicate whether the renin or aldosterone levels are elevated. A high ratio may indicate artery narrowing, while a low ratio suggests an aldosterone-producing tumor. Renin and aldosterone are part of the renin-angiotensin system, which helps regulate blood pressure. A high renin-aldosterone ratio may […]
Burn rate refers to the amount of loss incurred when insured property is destroyed compared to the amount of insurance protection guaranteed for that property. It helps individuals and businesses determine how much insurance coverage needs to be secured and maintained to cover total loss. Insurance companies use burn rate to set limits on coverage […]
The debt/equity ratio measures a company’s use of debt compared to total external financing. Financial ratios provide benchmarks for companies to compare their information with others, and the debt to total equity ratio falls within the group of the financial leverage ratio. Benchmarking is the primary use of the debt to equity ratio. The debt/equity […]
The Berry Ratio measures a company’s profitability by dividing its gross profits by operating expenses. A ratio of more than one indicates financial stability, while less than one can signal instability. It should be used alongside other measures of profitability. The Berry Ratio is a financial ratio that is used by investors and other business […]
Inventory turnover rate is a financial calculation that determines how many times a business replaces inventory to generate sales in a given period. It helps manage inventory levels and determine how much cash to tie up with inventory. Calculating the ratio helps understand how much inventory should be available on shelves at any given time. […]
The transmission ratio measures a company’s wealth compared to its debt. It includes various ratios such as the debt/equity ratio, interest coverage ratio, equity ratio, and debt ratio. Investors use these ratios to determine a company’s financial strength and reliance on debt. Highly leveraged companies are vulnerable during recessions, and volatile businesses should have less […]
The transmission ratio measures a company’s reliance on debt compared to equity. Various ratios fall under this term, including the debt/equity ratio, interest coverage ratio, equity ratio, and debt ratio. Investors use these ratios to determine a company’s financial strength and independence from debt. Highly leveraged companies are vulnerable, especially during a recession. The more […]
The price-to-book ratio measures the market value of a company relative to its book value and indicates whether a stock is overvalued or undervalued. The ratio varies by industry, and a ratio of less than one implies undervaluation. High returns on equity tend to result in higher price/book ratios. A price-to-book ratio is a measure […]
Mortgage lenders use the mortgage debt ratio to determine if a borrower can make monthly payments. The ratio is calculated by dividing monthly income by expected mortgage payments. Other debts are also factored in to determine the payback ratio, which should not exceed 30%. Anything above 40% would likely result in a loan refusal. The […]
Variable ratio writing involves writing two option contracts using a fixed number of shares of an underlying security, with a common approach being a two-to-one strategy. This strategy requires planning and precision and should only be used when the underlying security has limited volatility. Variable ratio writes are an investment strategy that involves writing two […]
Loan-to-value (LTV) is an equation used by mortgage lenders to assess their risk when lending money to a borrower to purchase a property. The ratio between the amount of money borrowed and the value or purchase price of the property is used to determine the LTV. The purpose of establishing LTV is to protect the […]
Ratio analysis simplifies complex financial statements, provides insight into a company’s financial stability and future, and allows for comparison with competitors. However, it is not exhaustive and depends on accurate financial statements. One of the main benefits of ratio analysis is that it can allow for a quick assessment of a company’s value. Although the […]
The debt-to-income ratio compares income to debt for a given period, useful for budgeting and assessing a borrower’s ability to take on additional debt. There are two types: front-end and back-end, with lenders setting a percentage range for approval. Variable charges must be disclosed. The debt-to-income ratio is a simple comparison between the income generated […]
Debt to equity ratio measures the ratio of equity versus debt used to finance a company’s operations. It is calculated by dividing total liabilities by net worth, but variations exist. Investors use it to determine risk when buying equity or bonds. Companies monitor it to keep share prices high and may pay off long-term debt […]
Power ratios are used by media companies to compare their revenue performance to their audience share. A ratio greater than 1.0 indicates a company is generating more revenue than expected, while a ratio below 1.0 indicates lagging sales. The ratio is calculated by dividing company revenue by the product of audience share and overall market […]
COFI is a ratio used by lenders and banks to calculate interest rates, based on interest expenses reported by financial institutions. It is used as the basis for interest rates on adjustable-rate mortgages and savings accounts, with a margin added to determine the rate. The cost of funds index (COFI) is one of the ratios […]
The dependency ratio measures the percentage of dependents in a population, calculated by dividing the number of people under 15 and over 64 by those between 15 and 64. High ratios can create problems for social security and pensions. Economists can learn about a society by studying the ratio, which can indicate the number of […]
The price-to-sales ratio (PSR) compares a company’s market capitalization to its revenue for the past 12 months. A lower ratio indicates greater value for each share. The PSR is useful for new companies or those with fluctuating earnings. Adjusting the ratio to include debt can help compare companies with different debt levels. Comparing PSRs between […]
