Analyzing a bank with the same metrics as an industrial or tech company leads to wrong conclusions. A bank doesn't make or sell products: its business is money itself. That's why it's measured differently.
Debt isn't a risk: it's the business
In a normal company, lots of debt is a red flag. In a bank, it's the opposite: its model is to take in cheap money (customer deposits and other funding) and lend it out more expensively. That "debt" is its raw material. That's why metrics like net debt/EBITDA don't apply: a bank will always have a huge balance of "debt" because that is, literally, its product.
Free cash flow doesn't apply either
Free cash flow (operating cash minus investment in factories and equipment) is key in almost any company. But in a bank it means nothing: it has no factories, and its "cash" is loans and deposits constantly flowing in and out. Computing a bank's FCF gives meaningless figures.
What to actually look at in a bank
If debt and FCF don't help, what do you focus on? Four things:
- Capital strength: how big a cushion the bank has to absorb losses. It's approximated by equity over total assets: the higher, the more resilient. Regulators use finer ratios (the well-known CET1), but the idea is the same: a well-capitalized bank withstands shocks; one with little capital is fragile.
- Profitability (ROE): ROE is especially useful in banking. It measures how much profit the bank squeezes from its shareholders' money. A sustained ROE above 10-12% usually points to a bank that manages its capital well.
- Bad loans: what share of loans isn't being repaid. Low, stable bad loans signal prudence; a spike, especially in a recession, is a bank's biggest risk.
- Net interest margin: the gap between what it charges to lend and what it pays to raise money. It's the engine of its profit and rises or falls with interest rates.
How StockSemáforo handles it
Since net debt/EBITDA and free cash flow make no sense for a bank, our analysis doesn't use those two metrics for financial health. Instead we measure capital strength (equity over assets), the right way to judge a bank's solvency. We assess profitability mainly through ROE and margins. So when you analyze a bank like JPMorgan or Wells Fargo, the rating reflects what truly matters in banking and doesn't unfairly penalize "debt" that, in their case, is the business.
In short
For a bank: forget net debt/EBITDA and FCF, and look at capital, ROE, bad loans and the net interest margin. To see these indicators for any U.S.-listed bank, type its ticker into the analyzer, or start with the fundamental analysis guide.