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Q for financial analysts.

post #1 of 21
6/30/09 at 5:30pm
Thread Starter 
Question, when investigating a bank's balance sheet, i'm wondering what to use as an Acid test ratio or quick ratio.

My thinking is that since current assets includes receivables and that receivables of certain banks are less then certain, should i eliminate receivables from my consideration or some ratio of the receivables? Or am i off in outer space?
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post #2 of 21
6/30/09 at 9:01pm
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post #3 of 21
6/30/09 at 9:13pm
It all depends. Well, technically the net receivables should already be adjusted by the company for allowance for doubtful accounts. However, it may be true that the allowance is too small considering the current economic conditions. In this case, you can adjust it by changing that allowance to an amount more reasonable in your view, and lowering the receivables accordingly. You can do research and maybe get some idea of what the realistic number would be, but I guarantee you that it wouldn't be 100%, or 50% or even 20%. However there is nothing wrong with applying your own standard and looking at what happens to the quick ratio if you completely take receivables out of the question. The best and the most accepted way, however, would be to dig into the financial statements and to analyze all the components line by line and to adjust accordingly.
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post #4 of 21
6/30/09 at 9:14pm
Bank financials do not lend themselves to the typical analysis you would use with the statements from industrials et al. Tread lightly, and get some basic knowledge of the banking industry and how funds flow in it.
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post #5 of 21
6/30/09 at 9:25pm
Quote:
Originally Posted by iammatt View Post
Bank financials do not lend themselves to the typical analysis you would use with the statements from industrials et al. Tread lightly, and get some basic knowledge of the banking industry and how funds flow in it.

probably much better answer than mine, i was just thinking up on writing up an addendum about this and gave up about a paragraph in..
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post #6 of 21
6/30/09 at 10:46pm
Thread Starter 
Quote:
Originally Posted by Flambeur View Post
The best and the most accepted way, however, would be to dig into the financial statements and to analyze all the components line by line and to adjust accordingly.

This is what I'm thinking about doing.

I know my way around manufacturing, and this is a different animal.
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post #7 of 21
6/30/09 at 10:52pm
Thread Starter 
Quote:
Originally Posted by iammatt View Post
Bank financials do not lend themselves to the typical analysis you would use with the statements from industrials et al. Tread lightly, and get some basic knowledge of the banking industry and how funds flow in it.

Sounds like a reasonable plan to me, i have a decent understanding of how banking works. I'd like to at this point see where i can see weak points on the balance sheets. I may simply do this by comparing the weak and the strong, something like a comparison between US bank and City.
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post #8 of 21
7/1/09 at 12:34am
Quote:
Originally Posted by SkinnyGoomba View Post
Sounds like a reasonable plan to me, i have a decent understanding of how banking works. I'd like to at this point see where i can see weak points on the balance sheets. I may simply do this by comparing the weak and the strong, something like a comparison between US bank and City.
I refuse to analyze banks anymore. It is just too difficult. You really need to break them up into each of their component businesses, and appraise and value each one separately, look for big problems (if you can actually find them) and then come up with some total valuation as the sum of the parts. The various businesses in which major banks are involved are just too different from each other to be able to treat them as monolithic. If I were you, I'd learn the insurance industry first, which is kind of similar to analyze but not as problematic, at least for the most part, and then look at banks. Remember, you can make a good living concentrating on one sector, you do not need to be a jack of all trades, and you really only need to have a couple dozen opinions even though there are thousands of companies out there. Anyway, that is my advice.
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post #9 of 21
7/1/09 at 12:59am
SkinnyG, you aren't starting another business in your basement are you?

dl
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post #10 of 21
7/1/09 at 1:08am
Thread Starter 
Quote:
Originally Posted by dl20 View Post
SkinnyG, you aren't starting another business in your basement are you? dl
lol ouch, glad i have such a stallar reputation. No this is just for my own knowledge i'm wondering which banks are getting priced correctly. I'm reasonably familiar with manufacturing as i grew up around it and involved in it, but i'm looking to expand my knowledge base.
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post #11 of 21
7/1/09 at 1:12am
Thread Starter 
Quote:
Originally Posted by iammatt View Post
I refuse to analyze banks anymore. It is just too difficult. You really need to break them up into each of their component businesses, and appraise and value each one separately, look for big problems (if you can actually find them) and then come up with some total valuation as the sum of the parts. The various businesses in which major banks are involved are just too different from each other to be able to treat them as monolithic. If I were you, I'd learn the insurance industry first, which is kind of similar to analyze but not as problematic, at least for the most part, and then look at banks. Remember, you can make a good living concentrating on one sector, you do not need to be a jack of all trades, and you really only need to have a couple dozen opinions even though there are thousands of companies out there.

Anyway, that is my advice.

Thanks for the advice, sounds like a good plan of action. I'll start with some simply insurance companies and work my way to banks from there.
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post #12 of 21
7/2/09 at 1:46am
Quick ratio incorporates inventory. What inventory does a bank own?
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post #13 of 21
7/5/09 at 1:02pm
I would not use ratios like that to analyze banks at all. First off, the MBS that are causing so much collateral damage in the sector would not even show up as current assets since they are not, well, current assets. They would show up as non-current assets, not receivables. Anyway, be careful applying rules of thumb from other sectors to banking, entirely different business obviously.
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post #14 of 21
7/5/09 at 3:26pm
one piece of advise, read footnotes furiously.
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post #15 of 21
7/7/09 at 1:52am
Quote:
Originally Posted by untilted View Post
one piece of advise, read footnotes furiously.

truth...
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