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Business Definition for: balance sheet ratios
balance sheet ratios
- ratios used in examining the financial condition, and changes in financial position, of any company, based on data reported in the balance sheet . Certain ratios are particularly applicable to banks. The most important are the capital ratio (measuring the ratio of equity capital to total assets) and liquidity ratios (measuring a bank's ability to cover deposit withdrawals and pay out funds to meet the credit needs of its borrowers). Other useful ratios are the loan-to-deposit ratio (total loans divided by total deposits) the charge-off ratio (net charge-offs as a percentage of total loans), the loan loss reserve ratio ( loan loss reserves for potential bad loans as a percentage of total loans), and the ratio of nonperforming asset to total loans. See also Net Interest Margin (NIM) ; Return On Assets (ROA) ; Return On Equity (ROE) .
- accounting ratios used by bank credit officers in evaluating creditworthiness of borrowers. The most widely used are: the acid-test ratio or quick ratio (short-term assets divided by current liabilities); the current ratio (current assets divided by current liabilities); and the debt coverage ratio (working capital divided by long-term debt). Financial ratios can be measured against ratios in prior years, or industry averages, for quick, easy comparison. Key performance ratios, such as the leverage ratio (long-term debt as a percentage of shareholder net worth), are frequently used in pricing commercial loans. A loan might have an interest spread over a base rate , for example, the bank prime rate plus 25 basis points if financial leverage is kept at, or below, a certain level. See also ratio analysis .
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