Articles tagged with:
ratios and calculations

  • WACC

    Weighted average cost of capital (WACC) is a calculation used as a standard of comparison for a number of different business decisions. As it is based on rates of return that are determined by the market or observable from published data, it provides a useful measure of how well a company is creating shareholder value and its current value.

  • Man handcuffed with the ace of hearts up his sleeve

    Small comfort found in CDS regulation

    Increasingly relied upon as an indicator of counterparty risk – whether bank or sovereign – credit default swaps have been in the media once again for all the wrong reasons. Financial engineers are creating far-fetched indices on which to base CDS prices on. What regulation can we expect to boost the credibility of these instruments?

  • Ashley Garvin and Yuri Polyakov

    Expect the unexpected: keeping Value-at-Risk relevant

    When it comes to understanding risk, the growing frequency of so-called ‘rare’ market events today, together with elevated volatility, means that the traditional Value-at-Risk (VaR) approach is less than perfect. Yet, Lloyds Bank believes that with certain enhancements, a VaR based methodology can prove to be invaluable in helping treasurers and risk managers to prepare for what the future holds.

  • Testing times for stressed out banks

    The results of the European bank stress tests are due to be released today. After last year’s whitewash, expectations – and tensions – are running high. But what impact will the judgement have on treasurers?

  • Basel III in numbers

    The regulations set out in Basel III mean that banks will have to maintain more robust capital reserves and equity buffers than they do at present. The accords, which were passed by the G20 last November, build on the principles established in Basel I and II. Treasurers now need more than a passing acquaintance with these ratios because their banks’ willingness to deal with them will be a direct function of their Basel numbers.

  • Working ratio

    The working ratio is used to determine whether or not a company is able to recover its operating costs from its annual revenue.

  • Using risk valuation: beware a false sense of security

    Whatever risk valuation techniques one chooses to employ, there is still no substitute for independent thought or discussion. This article looks at the limitations of popular risk valuation models and how different treasuries approach measuring and defining risk.

  • Solvency ratio

    The solvency ratio is used to measure a company’s ability to meet its long-term debt obligations. A high solvency ratio is usually an indicator of a healthy company with a low probability of defaulting on its debts. The solvency ratio takes into account a company’s post-tax income, excluding any non-cash depreciation expenses, in relation to its total debt obligations.

  • Total debt to total assets

    Total debt to total assets is one of the ratios used to measure a company’s financial risk. It determines what proportion of the company’s assets is financed by debt. The lower a company’s total debt to total assets ratio, the less leveraged the company is. That is, the less borrowing the company has. This makes the company safer from a creditor’s point of view but provides less return for shareholders. This is because the shareholders are financing a greater proportion of the business.

  • RAROC/RARORAC

    Risk-adjusted return on capital (RAROC) is a profitability metric that can be used to analyse return in relation to the level of risk taken on. It can be used to compare the performance of several investments with differing levels of risk exposure. It should not be confused with RORAC (return on risk-adjusted capital) which adjusts the capital invested based on the risks being taken. RAROC instead adjusts the return itself. RAROC was developed by Bankers Trust in the late 1970s and early 1980s in response to regulatory interest in the capital ratios of financial institutions and the implementation of capital adequacy regulations. RAROC is often used by banks to determine the amount of capital required to support the bank’s activities.