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    Evaluating financial health of two banks

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    A security analyst calculates the following ratios for two banks. How should the analyst evaluate the financial health of the two banks?

    Bank A Bank B
    ROE 22% 24%
    ROA 2% 1.5%
    Equity Multiplier 11X 16X
    Profit Margin 15% 14%
    Asset Utilization 13% 11%
    Spread 3% 3%
    Interest Exp. Ratio 35% 40%
    Provision for loan loss ratio 1% 4%

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    Solution Preview

    Evaluation of financial health of the company:

    Return on equity of bank A (22%) is lower than the return on equity of bank B, which indicates that the equity holders of bank A get less return than that of bank B. Therefore, bank B is more financially healthier than that of bank A. Bank A has generated more revenue for each dollar of asset ...

    Solution Summary

    This solution explains how a security analysis would evaluate the financial health of two banks, provided with various pieces of financial information about them, such as their ROE, ROA, equity multiplier, profit margin, asset utilization and spread.