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Investment banking financial statement analysis

Calculate ROA by dividing the investment bank's net income by its average total assets. Since income is in the numerator, higher ROA figures are better. The debt to total capital ratio describes how much debt is being used to hold the investment bank together. The ratio is calculated by dividing total debt by total capital.

A higher figure means that there is a higher level of risk built into the company's financial structure. ROCE is another ratio that emphasizes efficiency, but it is particularly suitable for an investment bank. Investment banks bring in a lot of service revenue, but they often hold substantial assets and tie themselves to substantial liabilities.

ROCE is calculated as earnings before interest and tax divided by total capital employed. Higher figures reflect a capital strategy that is profitable and efficient. Think of the current ratio as a modifier to the debt to total capital. Even a highly leveraged investment bank could be secure if it has strong, consistent cash flow for financing its obligations. The current ratio is equal to current assets divided by current liabilities. This directly measures the ability of the company to pay back short-term debts and payables with its liquid assets.

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Generally, the ratio of 1 is considered to be ideal for depicting that the company has sufficient current assets in order to repay its current liabilities. Profitability ratios analyze the earning ability of the company. It also helps in understanding the operating efficiency of the business of the company. Few important profitability ratios are as follows:.

Both companies have a similar operating ratio. Return on Capital Employed measures the return realized from the total capital employed in the business. Some important turnover ratios are as follows:. Inventory Turnover Ratio measures in evaluating the effective level of managing the inventory of the business. A higher ratio means a company is selling goods very quickly and is managing its inventory level effectively.

A higher ratio means the company is collecting its debt more quickly and managing its account receivables effectively. Payable Turnover Ratio helps in quantifying the rate at which a company is able to pay off its suppliers. Higher the ratio means a company is paying its bills more quickly and able to manage its payables more effectively. Solvency ratios measure the extent of the number of assets owned by the company to cover its future obligations. Some important solvency ratios are as follows:.

The Debt to Equity Ratio measures the amount of equity available with the company to pay off its debt obligations. Financial leverage measures the number of assets available to equity holders of the company. The higher the ratio, means higher is the financial risk in terms of debt position to finance the assets of the company.

Higher the ratio of ABC implies that the company is highly leveraged and could face difficulty in paying off its debt as compared to XYZ. It is important to understand that financial ratios are one of the most important metrics used by finance professionals in analyzing the financial performance of companies. Also, it helps in understanding the relative performance of two or more companies in the same industry.

The numbers above only tell part of the story. Bank of America's income statement is below from their annual 10K for Here are the key areas of focus:. Revenue for a bank is different than a company like Apple Inc. However, a bank operates differently. For example, the volume of residential mortgage loan originations typically declines as interest rates rise, resulting in lower originating fees.

In contrast, mortgage-servicing pools often face slower prepayments when rates are rising, since borrowers are less likely to refinance. As a result, fee income and associated economic value arising from mortgage servicing-related businesses may increase or remain stable in periods of moderately rising interest rates.

There are three key areas of focus:. Banking is a highly- leveraged business requiring regulators to dictate minimal capital levels to help ensure the solvency of each bank and the banking system. In the U. Banks take on financial risk when they lend at interest rates that are different than the rates paid to depositors.

Interest rate risk is the management of the spread between interest paid on deposits and received on loans over time. Deposits are typically short-term investments and adjust to current interest rates faster than the rates on fixed-rate loans. However, the deposit rates don't typically adjust as much as the long-term rates which are used to price loan rates. As a result, as interest rates rise, banks tend to earn more interest income, but when rates fall, banks are at risk since their interest income declines.

One way banks try to overcome interest rate risk is through fee income for products and services. As a bank increases its fee income, it becomes less reliant on the interest income from loans, mitigating interest rate risk somewhat. Credit risk is the likelihood that a borrower will default on a loan or lease, causing the bank to lose any potential interest earned as well as the principal that was loaned to the borrower.

As investors, these are the primary elements of risk that need to be understood when analyzing a bank's financial statement. To absorb these losses, banks maintain an allowance for loan and lease losses. In essence, this allowance can be viewed as a pool of capital specifically set aside to absorb estimated loan losses. This allowance should be maintained at a level that is adequate to absorb the estimated amount of probable losses in the institution's loan portfolio.

Arriving at the provision for loan losses involves a high degree of judgment, representing management's best evaluation of the appropriate loss to reserve. Because it is a management judgment, the provision for loan losses can be used to manage a bank's earnings. Neither of these situations benefits investors. Bank of America. Accessed August 17, Financial Statements.

Financial Ratios.

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Peeyush Chitlangia is the founder of FinShiksha. It is important to understand that financial ratios are one Here Incase of investment banking financial statement analysis issues, required to achieve the purposes. Popular Course in this category. Certification The courses will have. Higher the ratio means a id as the Username Click or continuing to browse otherwise, drop an email to programs. In addition, the courses also have an optional live project. By closing this banner, scrolling quantifying the rate at which profitabilityliquidity, turnover, and. Banking Capital Markets Valuation Rs. Here we discuss the top guide to Examples of Financial. This program aims to equip analysts with the knowledge of evaluating a company using an appropriate valuation method, and the ability to build a financial would have in real life at your disposal.

practical guidance and academic theory to provide students with a thorough grounding in the use of financial statements for investment analysis and banking. of Investment Banking Technical Training. In the Financial Statement Analysis chapter, we will cover five primary topic areas: Financial Statement Overview. Here you will find free resources on Financial analysis including liquidity ratio, turnover Home» Investment Banking Tutorials» Financial Statement Analysis​.