What is the Texas Ratio?

The Texas Ratio is a financial formula first developed by Gerald Cassidy and other analysts at RDC Capital Markets to measure how much stress a bank has and how likely it is that it will be around much longer.

The formula looks like this

Loans + Non-Performing Assets / Cash on Hand + Reserve

If the number is greater than 1 or 100% the bank might have a serious problem in the near future. An example of this ratio at work was Indymac Bank which had a ratio of 1.16 or 116% before the bank collapsed.

The reason this ratio is important is because it shows how much money they have available to deal with situations that may come up vs how much money is off somewhere else which they may or may not end up seeing again in the future.

A low number illustrates that the bank has lots of money to deal with emergencies, but a number too low could mean that the bank is not loaning out money and investing it so it is not making any money as a result. Which is rarely the case.

It is important to realize that a high ratio does not mean that the stock will go out of business. If the money that they invest is always growing and coming back to them they should stay in business forever. However there may be situations where they can lose that money or need money on hand so a high ratio can be a good possible warning sign of a bank likely to fail.

Other Financial Indicators

It is widely recommended to use indicators in combination with other financial indicators. Here are a few other indicators that can also give you some insight on the strength of the company.

Gordon Growth Model - This model estimates the future dividends that a company will pay out.

Cash Current Debt Coverage Ratio – This ratio gives you some insight on a company’s ability to repay its debts.

Operation Cash Flow Ratio – This shows the cash flow that a company has compared to its liabilities.

Return From Texas Ratio to Fundamental Analysis