# Fundamental ratio questions



## TPI (9 July 2014)

Hi,

I'm using Morningstar research through a Westpac brokerage account to look at company financials/ratios.

With net interest coverage, why would it be negative if earnings are positive and debt/equity is low or even zero?

Also for banks there is no net interest coverage ratio and also no operating margin % listed, what other ratios/figures can I use for banks that are comparable to these?

Would it be net interest margin % and cost income ratio %?

Also for banks instead of debt/equity ratio I am using the capital adequacy ratio, is this appropriate?

And what is the net gearing ratio, how is it different to debt/equity ratio?

Thanks!


----------



## ROE (9 July 2014)

TPI said:


> Hi,
> 
> I'm using Morningstar research through a Westpac brokerage account to look at company financials/ratios.
> 
> ...




Interest cover ratio measure how comfortable a business able to service its debt from earning
a business with interest cover of 8 is far more comfortable than the one with 3 or 4 as it would takes
a absolute massive hit to earning for them to be in trouble.

Bank profitability is usually measure by return on equity banks don't have interest covered ratio per say as
all their liability is usually match against the asset ... you borrow $500K for a home loan ...bank book your house as an asset to match against the 500K liability they borrow else where and get the margin in between.

the keys to banks financial strength is its asset on book, if they got bad asset that isn't worth as much 
in market as they place on the book ... a write down will comes sometimes and if they don't have adequate capital to covered for those event they will tap investors on the shoulders for more or if it is so large 
it may be the start of the end for them ..there is so much you can tap investor for equity when that ratio is blow 
banks is in trouble...

if Australia house price decline by 20% and majority of the banks earning comes from lending to Residential properties market, they would get hit because value on books is higher than real market value .... 

banks operating margin is the margin it cost them for debt vs the margin they lend out.
borrow mortgage back security at 4% lend out at 5% their margin is 1%


----------



## skc (9 July 2014)

TPI said:


> I'm using Morningstar research through a Westpac brokerage account to look at company financials/ratios.
> 
> With net interest coverage, why would it be negative if earnings are positive and debt/equity is low or even zero?




Probably because the company earned net positive interest (e.g. they had more cash than debt) so the "interest expense" data has a negative sign in front of it. Can you give an example?


----------



## TPI (9 July 2014)

ROE said:


> Interest cover ratio measure how comfortable a business able to service its debt from earning
> a business with interest cover of 8 is far more comfortable than the one with 3 or 4 as it would takes
> a absolute massive hit to earning for them to be in trouble.
> 
> ...




Thanks ROE, so for operating margin for banks the net interest margin maybe more relevant instead and I will leave out net interest cover, and also focus on return on equity too.


----------



## TPI (9 July 2014)

skc said:


> Probably because the company earned net positive interest (e.g. they had more cash than debt) so the "interest expense" data has a negative sign in front of it. Can you give an example?




Hi skc, that makes sense, an example would be REA, their debt to equity is listed as 0 and their net interest cover is -15.7, but recent earnings have all been positive from what I recall.


----------



## TPI (9 July 2014)

TPI said:


> focus on return on equity too.




And asset on book quality.


----------

