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• W2259569044 abstract "Record earnings. Return on assets and return on equity exceed the industry averages. A high quality loan portfolio. The nonperforming loans to gross loans ratio is below the industry average. The equity to total assets ratio is above the regulatory guideline. Growth in loans and deposits.Does this sound like your bank? Beware! It may be a bank in financial trouble.In 1988, financial ratios derived from the Bank of New England (BNE)'s balance sheet and income statement painted the rosy financial picture above. However, by January 1991, BNE filed for bankruptcy and the FDIC seized all bank assets. Why didn't management prevent this from happening?Financial ratios derived from BNE's cash flow statement for the year ending December 31, 1988, indicated several financial problems. Cash flow ratios provide information to closely monitor a bank's financial condition and operating performance in order to detect financial problems early. If financial problems are detected, and corrective action is then taken, a financial disaster can be prevented.This article presents several cash flow ratios that management accountants can prepare, analyze and report to upper management. Cash flow ratios are also calculated for two example banks to demonstrate the usefulness and interpretation of the ratios.PERFORMANCE RATIOSThe two most commonly used measures of bank profitability are return on assets and return on equity. Each ratio can be computed using the net cash flow from operations instead of net income in the numerator. Unlike net income, the net cash flow from operations provides a more concrete measure of performance because it does not reflect arbitrary allocation techniques and accrual accounting procedures that do not reveal the underlying cash flows of an entity. In addition, it reveals the net cash generated from operations that actually can be used for other activities.CASH RETURN ON ASSETS measures the cash return from operations per dollar of assets. It reflects management's ability to generate cash from all bank assets.Cash Return on Assets = Net cash flow from operations/Average assetsSince earning assets are the principal source of a bank's profits, a more meaningful measure of a bank's cash-generating efficiency is the ratio, CASH RETURN ON EARNING ASSETS. This ratio measures the net cash flow from operations per dollar of earning assets.Cash Return on Earning Assets = Net cash flow from operations/Average earning assetsCASH RETURN ON EQUITY reflects the cash return to stockholders. Since the average level of equity is much smaller than the average level of assets or earning assets, cash return on equity is expected to exceed cash return on assets and cash return on earning assets.Cash Return on Equity = Net cash flow from operations/Average equityAnother widely reported measure of profitability is earnings per share. This ratio also can be computed on a cash flow basis by replacing net income with the net cash flow from operations. The new ratio, Cash Flow Per Share, measures the net cash flow from operations per share of common stock, after the payment of preferred dividends.Cash Flow Per Share = Net cash flow from operations Pref./Div. Weighted average number of common shares outstandingCash return ratios that exceed industry average ratios suggest that the bank is efficient in generating cash from operating activities and provide favorable signals about the likelihood of future cash flows. On the other hand, ratios that are less than the industry averages, or negative ratios, indicate operating cash flow problems and, in turn, liquidity problems.QUALITY OF INCOMEThe OPERATING CASH FLOW INDEX expresses the net cash flow from operations as a percent of net income. The net cash flow from operations should exceed net income because net income reflects several noncash charges such as depreciation expense and the provision for credit losses. …" @default.
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• W2259569044 date "1994-01-01" @default.
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• W2259569044 title "Is Your Bank in Financial Trouble" @default.
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