Profitability Valuation Flashcards
ROE is equal to… what it represent
NI/equity average
It is the net benefits to owners —> the higher the better
ROA is equal to… and what it represent
ROA= NI/ Total assets average
Profit per 1$ of TA, measure of the performance of the manager asset efficiency
Equity multiplier is equal to..
EM= total assets average/ equity average
It represents the leverage
Using Dupont ROE is also equal to..
ROE = NI/ total assets * TA/ equity
ROE = ROA * EM
ROE = (NI/TOI * TOI/TA) * TA/E
ROE= Profit margin * asset utili*EM
ROA is the true measurement of efficiency given equity multiplier is regulated
Net interest margin is equal to…
NIM = (int rev - int exp)/ TA
The higher the better
N et operation cost is equal to
NOC= (oper exp + PLL - other rev)/TA
PLL = provision for loan loses
The burden is equal to
Burden =. (Oper exp - other rev)/TA
The lower the better. It is off the balance sheet
Total operating income is equal to
TOI = int rev + non interest rev
Finance institution they are like banks… they are unlike banks… and how do they obtain fundings
-they make loans like banks
-they dont accept deposits unlike banks
And they obtain funding by issuing CPs and bonds
The insurance institutions, how they cover the claims, invest in which type of securities
-They sell insurance policies (life, universal) and general policies (car insurance)
- written premium provided by policy-holders are used to cover commissions, administrative expenses ans claims incurred within the year
-reserves are put aside as commitments by the insurer for the policyholder and invested in securities of maturity equivalent to contracts (longer for life policies and shorter for general policies)
Common financial ratio for life and P/C insurance
Net underwriting margin
NUM = premium incom- policy exp/TA
Underwriting efficiency for P/C
Loss ratio = loss expenses/ total premium earned
Expense ratio = operating expenses / total premium earned
Overall profitability for PC insurance
Overall profit = combined ratio - investment yield
Combined ratio = loss ratio + expense ratio
If the profitability is higher than 100% a P/P insurer has an underwriting loss with expenses greater than investment income
Investment banks ans securities firms what are they doing
-underwriting for devt and equity securities, private placements, M&A, restructuring finance
-their principal transaction: involves trading (securities, commodities), investment activities, hedging and derivatives
-wealth management
-back office activities (research, settlement)
What is a Mutual fund
-a mutual fund is a type of investment consisting of a portfolio of stocks, bonds or other securities
-open-end investment companies buy and sell shares continuously
-close-end investment companies issue fixed number of shares and no redemption till maturity
Investment trust: shares in a specific portfolio such as real estate, oil, gas. They receive cash (trust) instead of dividend (mutual fund)
