Top Five Financial Ratios for Portfolio Analytics and Reporting in Financial Institutions
Financial institutions often use various financial ratios to assess the health, performance, and risk levels of their portfolios. These ratios are crucial for decision-making, risk management, and compliance with regulatory requirements. Here, we will explore the top five financial ratios commonly used in portfolio analytics and reporting.
1. Debt-to-Equity Ratio
The debt-to-equity (D/E) ratio is a quantification of a firm’s financial leverage. It is estimated by dividing the total liabilities by shareholders' equity. This ratio indicates the proportion of equity and debt used by the company to finance its assets. A higher D/E ratio suggests a greater reliance on debt, which can increase financial risk.
Formula
Total Liabilities / Shareholders Equity
2. Current Ratio
The current ratio is a liquidity ratio that measures a company's ability to pay back short-term obligations. It is also known as the cash asset ratio, cash ratio, or liquidity ratio. A higher current ratio indicates a higher capability of a company to meet its short-term debt obligations.
Formula
Current Assets / Current Liabilities
3. Quick Ratio
The quick ratio, also known as the “acid test ratio” or the “quick assets ratio,” is a more stringent measure of short-term liquidity. It is helpful in measuring a company’s ability to meet its short-term debts with its most liquid assets, excluding inventory.
Formula
(Current Assets – Inventories) / Current Liabilities
4. Return on Equity (ROE)
The return on equity (ROE) is a measure of the profitability of a corporation, indicating how much profit a company generates with the money invested by its shareholders. It is expressed as a percentage and is computed by dividing net income by shareholders’ equity. ROE is also referred to as “return on net worth” (RONW).
Formula
Net Income / Shareholders Equity
5. Net Profit Margin
The net profit margin is a key metric that indicates the efficiency of a company at controlling its costs and converting revenue into actual profit. A higher net profit margin suggests better profitability and efficient cost management. This ratio is useful for benchmarking companies in the same industry, as they share similar market conditions and business environments.
Formula
Net Profit / Net Sales
By leveraging these financial ratios, financial institutions can gain valuable insights into their portfolio performance, manage risks effectively, and ensure compliance with regulatory standards.