Financial ratios de-mystified

With all that is happening in Wall Street and Main Street, all of us must be wondering about the various Financial terminologies floating in the air, like pollen. I realized that this is causing Financial Asthma in many of us, and decided to do something about it.

Here is an imaginary list of Financial terminologies that any future author of books on Finance for future Investment banks ( if at all they continue to exist) will most likely come up with. I am sure this will be the badly needed Broncho-dialator we all need, to get over this bout of Financial asphyxation.



ROCE : Return OF capital employed in an investment bank ( previously understood as Return on Capital employed, erroneously. Such mistakes do occur of(f) and on…). Quite often this never occurs.

Leverage ratio: The number of times the assets in your balance sheet can be leveraged for borrowing, using “structured products”, mortgage- backed secutiries” etc… the commonly found ratio in Wall Street is 30 or above.

DCF – Diminished cash flows. (Earlier call Dsicounted Cash flow) . The more this is in the negative , the better prospects are, for Govt takeover.

IRR – Internal rate of Ruing ( Earlier called Internal rate of return). A strong indicator of how much the hapless investor and the depositor fumes inside. Higher the IRR, the better for the CEOs.

Payback – the earliest time it takes for the first $100M in Exec compensation, for the CEO to realize. Please note that this indicator remains strong, even if the company goes belly up.


Profit and Loss: Refers to the position of the CEO and the equity investor, respectively. For some time, it used to provide operational indicators for the company.

Balance Sheet – Means a Blank sheet (plain sheet of paper) . Earlier, used to provide a list of assets and liabilities of the company.


Quick Ratio – a measure of how quickly the investors lose their capital after investing in the company.

Cash Flow - Refers to the amount of cash that will flow from the Fed’s discount window, followed by the Fed’s Bailout plan, and topped up by the taxpayer, with the objective of protecting executive compensation.

Working Capital Advances : The extent to which the Capital ( read: the Fed) advances in working out a bail-out package.


Provision for taxation : The provisional increase the Federal Govt is planning to tax the hapless taxpayer in the ensuing years, to cover for the bail-out package.

Payout Ratio : The ratio of payout to the Execs to the amount of write offs in a quarter. Earlier definition was Dividend per share upon Earnings per Share.

Asset turnover : Refers to the number of times the same mortgage asset can be used as collateral, to create multiple “mortgage backed securities”. Earlier it used to be Total Asets upon Total Sales.

Debt Ratio: The ratio of the average debt every American will be in after he foots the huge bail-out package, upon his average monthly income.

Profit margin : Refers to the margin of profits that people like Warren Buffet, the Sheikh of Arabia, China’c CITIC etc will make, when they eat up beaten down investment banks.

P/E ratio : Also called Pride to Envy ratio . This is a measure of the tussle that goes on in the minds of the average Wall Streeter , a fight between the Pride in his country’s Assets ( as in “ Merill Lynch is a National Asset” kind of observations) and the Envy over the Chinese ability to draw up huge cash surpluses.

EPS : Refers to Emergency Pro-Note Service. Also called as Discount Window. This is a facility the Govt has created for the benefit of over-leveraged investment banks who have no further recourse, when creditors knock at their doors.

Risk-adjusted Return On Capital (RAROC) : Also called Zero. Invented by the Indians thousands of years ago. Refers to the real return to investors in investment banks, after adjusting for all the risks

EVA ( Economic Value Added) : The extra profits that Sovereign Investment funds and “predatory investors” add to their portfolios after they take over the investment banks on the mat.