Performance Analysis
Settling the Profitability Debate
Focus on ROE Not ROA
By Tom Parliment
July-August 1993
This article runs the math on why it is more important to focus on ROE than it is to focus on ROA.
- Importance of leverage in managing ROE
- An investment leveraging strategy
The Power of Leverage – For Managing Earnings
By Tom Parliment
March-April 1994
Tom Parliment looks at the effect of leveraging capital on an institution's ROA and ROE. In times of declining ROAs his thesis advocates the use of leverage to hold up the ROE for Tom's bank and your own institution.
- Relationship between ROE, ROA, and Leverage.
- Effect of leverage on a case institution's financial performance.
Over-Capitalized? Struggling With A Low ROE?
By Tom Parliment
May-June 1994
Tom Parliment extends his leverage discussion. He advocates using leverage to gradually increase earnings per share, resulting in a growth of an institution's stock price.
- Tradeoffs in improving ROE
- Raising ROA
- Focus on gradual increases in EPS.
- Focus on retail leverage.
- Supplement with wholesale leverage.
Evaluating Financial Performance - Part 1
By Tom Farin
May-June 1994
This is the first part of a three part series on evaluating financial performance. Tom Farin introduces the tree diagram as a tool for diagramming the relationship between key ratio measuring financial performance. This issue focuses on the ROE tree.
- Fort Knox Savings is case example
- Through balance sheet and income statement.
- hy use financial ratios in evaluating performance
- Components of ROE - ROE Tree
- Components of ROA
Financial Performance - Part 2
By Tom Farin
July-August 1994
This is the second of a three part series where Tom Farin uses a tree diagram to explain the relationship between the key ratios that affect financial institution performance. This article examines the net interest margin tree and the net non-interest margin tree. Numbers are pulled from the Fort Knox case.
- Continues to analyze Fort Knox Savings case
- oducing the Net Interest Margin Tree
- Role of EA/AA ratio
- Role of spread, yield and cost.
- Components of yield.
- Components of cost.
- Role of interest free funding.
- Relationship between non-interest income and expense.
Reconciling Financial Goals - The Goal Tree
By Tom Farin
September-October 1994
This is the third of a three part series written by Tom Farin that uses a tree diagram to explain key ratios that drive an institution's financial performance. This article looks at the relationship between growth rate, earnings, dividends, and the capital/asset ratio.
- Setting capital goals.
- Setting growth goals.
- Setting profitability goals.
- Establishing dividend targets.
- Reconciling financial goals.
- Determining external capital financing needs (ECFN).
- Dealing with positive ECFNs
- Dealing with negative ECFNs.
The Math of Calculating Stockholder ROI
By Tom Farin
July-August 1994
This article extends on the Fort Knox case article by explaining the math used in calculating stockholder ROI.
- Calculating EPS
- Calculating price from EPS
- Calculating TRR from stock price appreciation and dividends.