Question

Describe any structural challenges to making meaningful comparisons between the bank (FDIC) financial data and credit union (NCUA) financial data created by differences in their respective definitions of financial ratios or classification (or definition) of financial statement elements used to compute such ratios.

Answer 1

A common use of financial ratios is when a lender determines the stability and health of your business by looking at your balance sheet. The balance sheet provides a portrait of what your company owns or is owed (assets) and what it owes (liabilities). Bankers will often make financial ratios a part of your business loan agreement. For instance, you may have to keep your equity above a certain percentage of your debt, or your current assets above a certain percentage of your current liabilities. But ratios should not be evaluated only when visiting your banker. Ideally, you should review your ratios on a monthly basis to keep on top of changing trends in your company.

For example Leverage ratios; These ratios provide an indication of the long-term solvency of a company and to what extent you are using long-term debt to support your business. Debt-to-equity and debt-to-asset ratios are used by bankers to see how your assets are financed, whether it comes from creditors or your own investments, for example. In general, a bank will consider a lower ratio to be a good indicator of your ability to repay your debts or take on additional debt to support new opportunities.