One of the easiest (and very effective) ways to gauge a company’s finances is via their assets and liabilities. It is certainly true to account for factors such as company management, cash flow statement, earning statement, and other reports; it is also the career of an accountant! Since most of the people out there are not quite full time accountants, it makes perfect sense to zero in on what we consider as the top KPI (Key Performance Indicator). This KPI provides a good measurement on the company’s financial well being and it is applicable for the subject of our interest – FDIC Banks.
FDIC Banks are insured by the Federal Deposit Insurance Corporation. In the event that the bank goes bankrupt, the FDIC will reimburse the account holders up to $100,000 per depository account. As good a safety net as the FDIC is, it is wise to choose a bank in good financial status (a low probability of going bankrupt).
We first review two key accounting terms:
Assets – something possessed by a business entity from which future economic benefits may be obtained. In everyday terms: what the company controls in $-value.
Liabilities – future sacrifice of economics benefits that the entity is presently obliged to make to other entities as a result of past transactions and other past events. In everyday terms: what the company owes in $-value.
Putting them together we derive the following Assets: Liabilities Ratio:
This KPI corresponds positively to the bank’s financial well-being. The higher the ratio, the more financially secured the bank is.
Example 1: John Doe’s bank has a reported total asset of $1,000,000,000 and total liabilities of $800,000,000. The Assets: Liabilities Ratio is therefore 125%. So the bank’s assets exceed the liabilities by 25%. This means that there is little to fear about the bank’s ability to pay its dues.
Example 2: Jane Doe’s bank has a reported total asset of $9,500,000,000 and total liabilities of $10,000,000,000. The Assets: Liabilities Ratio is therefore 95%. So the bank’s assets are 5% short to cover its liabilities. This should serve as a big warning sign for the possibility that the bank might run short.
Summary Statistics (2008 Q2)*
50 percent of the banks are between 107.53% and 111.45%
90 percent of the banks are between 104.25% and 123.69%
Mark is responsible for the recruitment of talents and leads the research efforts at Money Economics. He has undergraduate degrees in math and economics and a graduate education in mathematical sciences.