Net NPA Ratio

Net NPA Ratio = Net Non Performing Assets (NPA)/Loan Given

NPA is a term used for those loans whose scheduled payment of principal or interest has not been made for a period more than 90 days.A higher NPA ratio is dangerous for the survival of any bank as it means that the bank has a huge quantity of bad debt.

Net NPA ratio greater than 1% is undesirable.

NPA Provision

NPA provision is the amount kept aside by the bank to cover the future losses that would occur due to defaults over Non Performing Assets. The above values include the provisions made for Standard as well as restructured assets.

A sharp increase in NPA Provision means that the bank expects higher NPA for the following year which is not a good sign.

Borrowings to Net Worth Ratio

Borrowings to Net Worth Ratio = Borrowings / Shareholder Equity

This is similar to Debt Equity Ratio for other kind of companies. However, in case of banks a Borrowings to Net Worth Ratio up to 1.5 is tolerable while for other companies, it should be below 0.5. A high debt means a higher interest and it erodes the profit figures. During the recession, the profit gets eaten up by interest payments over a high debt.

Financial Leverage Ratio

Financial leverage ratio = Total Assets / Net Worth

Financial Leverage Ratio is a measure of the total assets held by a company compared to its net worth. A high financial leverage means that the bank is using debt or other liabilities to finance its assets. Thus. a high financial leverage ratio implies volatility and instability. During the down turn of the economy, the banks that have high financial leverage ratio will struggle to survive because their operating income won’t be sufficient to meet the cost of liabilities which they hold.

A financial leverage ratio above 10 is undesirable.

Loan to Deposit Ratio

Loan to Deposit ratio = Loans and advances / Deposits

Loan to Deposit Ratio is used to assess the liquidity situation of the bank. If the bank has a loan to deposit ratio close to 100%, it means that the bank has given out most of its deposits as loans due to which it may find it challenging to meet any fund requirements. At the same time, a low loan to deposit ratio indicates that the bank is not making an optimum use of its deposits to earn profit.

An ideal value of LDR is 80-90%. A loan to deposit ratio above 100% is unhealthy.

Income vs Operating Cashflow

Operating Cash Flow = EBIT (Earnings Before Interest & Tax ) + Depreciation & Amortization – Changes in Working Capital

Operating Cashflow is the amount of cash generated by the company’s general operations. For an ideal company, the operating cash flow would normally be higher than the net income and would tend to be parallel to the net income unless in case of a huge shift in company’s strategy which you should investigate about.

A huge deviation between income and operating cash flow depicts the possibility of accounting manipulation. Operating Cashflow is a very important metric when you want to analyse about how reliable a company’s profit figures are.

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