There are six basic ratios that are often used to pick stocks for investment portfolios.

These include the working capital ratio, the quick ratio, earnings per share
(EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE).

Financial Ratios to Analyze Investment

Banks
By
SEAN ROSS

Updated July 21, 2021

Reviewed by
CHIP STAPLETON
It can be tricky for the average investor to evaluate an investment bank
properly. The general rules of stock-picking apply – profitability is good,
rising dividends are better, and cash flow should be sustainable – but there
are also some additional metrics with particular relevance for investment
banks. These include shareholders' equity metrics, the composition of
liabilities, debt to total capital, return on capital employed (ROCE)
and return on assets (ROA).

Successful Investment Banks

The investment banking industry makes up a large part of the overall
financial sector of the economy, particularly when it comes to the capital
and credit markets. Successful investment banks identify opportunities to
assist promising companies to grow even faster and create liquidity in the
stock market.

At a basic level, investment banks work with larger organizations

or institutional investors. They offer advice, investment services, help with
raising or managing new capital, or sometimes act as principals.

These tend to be substantial financial institutions with solid ties to Wall

Street. Investment banks earn much of their revenue through fees or
commissions. They also have their portfolios and can profit from their
holdings.
To analyze an investment bank, you need to understand how efficiently it
can acquire assets, make investments, manage risk, and subsequently
turn a profit for shareholders.

The Price-to-Earnings Ratio

Think of the price-to-earnings (P/E) ratio is the price you have to pay to get
access to company earnings. The P/E ratio is calculated by dividing price
per share by earnings per share (EPS). This information should be
available in every major investing website or publication.

Return on Assets
The ROA metric reveals the earning capacity of profit by an investment
bank to its total assets. Use this to gauge how effectively management
uses the bank's existing asset base to make profits for shareholders.
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.

Return on Equity
Probably second in popularity only to the P/E ratio, the return on equity
(ROE) ratio helps express how effectively a company rewards its
shareholders for their investment. For example, consider a company that
earns $500,000 in net income and has an average stockholders' equity of
$10 million. You can calculate ROE by dividing $500,000 from $10 million
to get 0.05, or 5%. This means every $1 of shareholders equity turns into 5
cents in profit. Like ROA, higher numbers are preferred for ROE.

Debt to Total Capital

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. Analysts similarly use
this ratio to the debt/equity ratio.

Return on Capital Employed

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.

The Current Ratio

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.