One can perform a ratio analysis on a company’s financial results to determine its financial health. These ratios can also be analyzed side by side historically to predict the trajectory of the organization. A company is usually gauged against its industry peers since different sectors do not utilize resources in the same manner. Ratios act as comparison points for organizations and can be used to evaluate stocks within an industry. While ratios are essential, the variables driving them are even more important because companies can strategize to make their metrics more attractive.
This paper will look at Chase Bank, also known as JPMorgan Chase. Chase Bank goes by the ticker JPM in the financial listings, and this will also be used to refer to the bank henceforth. JPM is a national bank with headquarters in Manhattan, New York City. It operates both a consumer and a financial arm (“History of Our Firm,” n.d.). The bank was called the Chase Manhattan Bank until 2000 when it merged with JPMorgan & Co. Since its founding in 1799, JPMorgan has combined with and acquired many other banking institutions. The bank offers more than 4700 branches, 16000 ATMs, and employs more than 250000 workers worldwide as of 2016 (“History of Our Firm,” n.d.).
JPMorgan is one of the big four banks in the United States together with Bank of America, Citi, and Wells Fargo; of these four, JPM is the largest by market capitalization (“History of Our Firm,” n.d.). These factors underscore the positional significance of JPMorgan is and its importance in the world economy.
Solvency Ratios
Solvency ratios measure an organization’s ability to meet long-term and debt obligations. It is used mostly by prospective lenders of the company (Koch & MacDonald, 2015). It measures the financial health of an organization by gauging whether its cashflow can meet its long-term liabilities. The ratios are debt-to-equity, the interest coverage ratio, the equity ratio, and the debt-to-asset ratio (Koch & MacDonald, 2015). In 2017 JPM had a debt-to-equity ratio of 1.21, 1.37 in 2018, 1.27 in 2019, and 1.17 in 2020 (“JPMorgan Chase PE Ratio,” n.d.). One calculates the debt-to-equity ratio by dividing the company’s debt by its equity.
For JPM, the ratio is consistently above 1, meaning that the company consistently has a higher debt than equity. This figure indicates that the company could have problems covering its debts if it were to liquidate. For 2017, 2018, 2019 and 2020, JPM had debt to asset ratios of 0.13, 0.13, 0.12 and 0.10 (“JPMorgan Chase PE Ratio,” n.d.). This number indicates that the company had fractional debt compared to its assets; this is a strong pointer that indicates that JPM has consistently been in a position where it would comfortably pay its debts from its assets (Koch & MacDonald, 2015). The figure also seems to be dropping since 2017, indicating a strengthening trend.
Profitability Ratios
Analysts use profitability ratios to assess a business’s income-generating ability compared to its assets, revenues, operating costs, and equity. The ratios depend on data from a specific period. Profitability ratios are closely related to efficiency ratios that look at how well a company utilizes its assets internally to generate earnings (Koch & MacDonald, 2015). Examples of profitability ratios include gross profit margin, operating margin, pre-tax margin, net profit margin, return on equity, and return on assets (ROA).
A horizontal analysis will be carried out for the years 2017, 2018, 2019, and 2020. In this period, JPM had gross profits of 99624, 109,029 115,627 and 119,543 million USD respectively (“JPMorgan Chase PE Ratio,” n.d.). These numbers indicate that JPM kept increasing its gross profits over the four years, indicating growth. JPM also had a net margin of 22.65%, 28.17%, 29.96%, and 22.93% over the same period, respectively (“JPMorgan Chase PE Ratio,” n.d.). Their net margins increased from 2017 to 2019 and decreased in 2020, probably due to the COVID-19 economic crisis. For Return on Equity (ROE), JPM had an ROE of 8.85%, 11.99%, 13.37%, and 10.14% (“JPMorgan Chase PE Ratio,” n.d.). The ratios from the four years indicate consistency from the company.
ROE measures a company’s ability to convert equity into earnings. ROE of between 12-15% is considered desirable, and the higher, the better. In the case of JPM, their ROE from 2017 has only surpassed 12% one time, indicating that JPM has not been converting their equity well into earnings. In the same period, JPM had an ROA of 0.97%, 1.26%, 1.37%, and 0.96% respectively (“JPMorgan Chase PE Ratio,” n.d.). ROA indicates how well a company converts its assets into earnings, and the number depends on the industry. In this case, comparing JPMs ROA from history shows that its ROA increased from 2017 to 2019 but dropped in 2019, probably due to the COVID-19 economic slump.
Efficiency Ratios
Efficiency ratios are used to analyze the internal usage of a company’s assets and liabilities. Efficiency ratios can be used to calculate receivables turnover, repayment of liabilities, usage of equity, and general machine and inventory usage; efficiency ratios are also called activity ratios (Koch & MacDonald, 2015). For the years 2017, 2018, 2019, and 2020, JPM had a fixed turnover ratio of 7.04, 7.50, 5.68, and 4.52 (“JPMorgan Chase PE Ratio,” n.d.).
The fixed asset turnover ratio indicates the rate at which a company can convert its fixed assets into revenue (Koch & MacDonald, 2015). Since the number depends on the industry, horizontal analysis of JPM’s results shows that their FATR dropped from 2019, which is not favorable. For the same period, JPM had a constant asset turnover ratio of 0.04. In comparison, BOA had a similar number over the same period except for 2020, where their asset turnover ratio dropped to 0.03. Citigroup also had a constant asset turnover ratio of 0.04 over the same period (“JPMorgan Chase PE Ratio,” n.d.). Since JPM performed similarly to its peers, it is safe to conclude that their internal operations are efficient.
Valuation Ratios
Valuation ratios are used to measure the attractiveness of a company to investors. They utilize the price of a stock to gauge whether it is overvalued or undervalued. Some valuation ratios include price to earnings (PE), price to book (PB), price to sales (PS), and price to cash flow (PCF). JPM’s PE ratios for the close of the year days in 2017, 2018, 2019, and 2020 were 16.97, 10.87, 13.00, and 14.33 (“JPMorgan Chase PE Ratio,” n.d.). JPMorgan’s share price is $152.91, while their diluted earnings per share for the trailing 12 months ended December 2020 was $8.87; this gives JPMorgan a PE ratio of 17.24. PE ratio has increased from 14.33 in December 2020 to 17.24 now, indicating an uptrend.
Liquidity Position
Organizations must evaluate their liquidity position because it measures their ability to convert assets to cash and the ability to meet their financial obligations on time. The liquidity position is calculated using liquidity ratios. Liquidity ratios include current ratio, cash ratio, and operating cash flow ratio (Koch & MacDonald, 2015). From 2017 to 2020, JPM had current ratios of 0.86, 0.92, 1 and 1.02 (“JPMorgan Chase PE Ratio,” n.d.).
The current ratio is a metric used to gauge a company’s ability to pay its debts without selling its inventory or raising more capital (Koch & MacDonald, 2015). It is a ratio of a company’s quick assets (cash equivalents, securities, and receivables) against its debts (Koch & MacDonald, 2015). From JPMs data, one can see that the company has not had a favorable quick ratio over the first two years of the period and barely broke even for 2019 and 2020. This means that JPM would struggle to pay off its debts with its quick assets.
Quick ratio differs from current ratio in that it does not include inventory in its calculation. JPM’s quick ratio for the trailing 12-month period from Dec 2019 to Dec 2020 was 0.22 in December 2019, 0.26 in March 2020, 0.31 in June 2020, 0.34 in September 2020, and 0.37 in Dec 2020 (“JPMorgan Chase PE Ratio,” n.d.). Statistically, the 12-month trailing quick ratio average has been 0.31; the lowest was in September 2015 at 0.03, while the highest was in December 2012 at 0.44 (“JPMorgan Chase PE Ratio,” n.d.).
From the recent results of 2020, the quick ratio has not deviated dramatically from the average, indicating consistency; however, the number indicates that JPM would struggle to settle its debts from the sale of current assets and would need to resort to other means. In comparison with its peers, JPM ranked 15th; among the big four, Citi had a quick ratio of 0.45; Wells Fargo was at 0.39 and BOA at 0.3. Since most of these metrics depend on the industry, JPM seems to be within acceptable limits given the proximity to its big-four peers.
Comparing JPM’s Assets to its Mission and Vision
JPM’s vision is to aspire to excel, execute superbly, build a great team and a winning culture; their mission is to be the best in offering financial services. It is safe to say that JPM has succeeded in its mission and vision from how big their holding company is. The company offers a range of services, namely consumer banking, commercial banking, investment banking, and asset management for persons, corporations, institutions, and governments worldwide. The Manhattan-based bank competes globally with a wide range of banks, investment banking firms, private equity companies, insurance organizations, and investment managers.
JPMorgan has some of the fiercest and most respected companies in the world as competitors. Some of its peers include Bank of America, Citigroup, Wells Fargo, Morgan Stanley, and Goldman Sachs A breakdown of JPM’s segment for the financial year ended 2020 shows that their net income breakdown was 55% from consumer and community banking, 27% from corporate and investment banking, 10% from asset and wealth management, and 8% from commercial banking (“JPMorgan Chase PE Ratio,” n.d.). JPM posted a net income totaling $29.1 billion against a revenue of $119.5 billion for the year 2020.
The bank’s revenue was 5% higher than the previous year, attributed to an increase in non-interest revenue of 11.7%, offset by a slight decrease in net interest income by 4.75. The net income reduced by 20% compared to 2019, attributed mainly to the COVID-19 economic upheaval (“JPMorgan Chase PE Ratio,” n.d.). It is worth noting that JPMorgan’s numbers did not slump dramatically despite the COVID-19 pandemic.
JPM income is generated from the following segments: consumer and community banking, corporate and investment bank, asset and wealth management, commercial banking, and corporate. The consumer and community banking segment provides various services to businesses and consumers, such as deposits and investments, payment solutions, cash management, mortgage servicing, issuance of credit cards and loans (“JPMorgan Chase PE Ratio,” n.d.).
JPM’s corporate and investment segment manages investment banking, prime brokerage, market-making, treasuries, and securities services to corporations, institutions, investors, and governments. The segment reported a net income growth of 43% compared to 2019. This segment contributes 55% of JPM’s total net income (“JPMorgan Chase PE Ratio,” n.d.). This figure indicates that the community banking segment is the largest in JPMorgan.
JPM’s commercial banking segment provides comprehensive financial products such as lending, investment banking, wholesale payments, and asset management to varied clients, including SMEs and local governments. The segment’s net income for 2020 was down 34.9%, mainly due to COVID-19. JPM’s other division is Asset and wealth management which provides services spanning all asset classes; the segment has over $2.7 trillion under its control (“JPMorgan Chase PE Ratio,” n.d.). The segment offers retirement products and services too as well as brokerage and banking. The segment’s net income increased by 4.4% in 2020 and comprised close to 10% of JPMs total income.
JPM’s corporate segment is involved in measuring, monitoring, reporting, and managing the bank’s liquidity, capital, and forex risks, among others. The division posted a net loss of $1.8 billion for 2020 compared to a net income of $1.1 billion for 2019 (“JPMorgan Chase PE Ratio,” n.d.). It is not all rosy for JPM in its mission to be the best in the world as it is reported to be closing its private banking operations in Mexico as it did with Brazil in the previous year.
JPM’s Capital Adequacy
Capital adequacy is measured using the capital adequacy ratio (CAR). CAR measures a bank’s available capital as a fraction of its risk-weighted credit exposure. Capital-to-risk weighted ratio is the other name for CAR; it is intended to protect depositors and helps protect the stability of financial organizations. There are two types of capital measured: tier-1 capital capable of absorbing losses without the bank being asked to close; tier-2 can be asked to stop trading since it can absorb losses if it were to wind up.
Horizontal analysis of JPM’s common equity tier-1 (CET1) was analyzed from 2010. The numbers were 9.8%, 10.1%, 11%, 10.7%, 10.2%, 11.8%, 12.3%, 12.2%, 12%, 12.4% and 11.3% (“JPMorgan Chase: CET1 ratio 2019,” n.d.). JPM has remained safely above the required threshold of 4.5% for a long time. The requirement is mandated under Basel III, an internationally recognized standard that sets safeguards worldwide to protect the banking industry’s stability. Banks are required to put sufficient capital on standby to meet unexpected losses and to remain solvent during crises (“JPMorgan Chase: CET1 ratio 2019,” n.d.). The measures were set after the 2008 financial crisis. JPMorgan had the highest tier 1 capital level amongst all banks in America in 2019; this is an indicator that JPMorgan is the strongest bank in the US in terms of capital.
Whether to Buy JPM
This section will analyze various ratios that indicate whether a company’s share price is valued fairly. As of March 9, 2021, JPM’s has a PE ratio of 17.24; the price to earnings ratio is a financial ratio that compares the price of a stock against the company’s earnings per share (“JPMorgan Chase PE Ratio,” n.d.). JPMorgan’s share price today is $152.91, while their diluted earnings per share for the trailing 12 months ended December 2020 was $8.87; this gives JPMorgan a PE ratio of 17.24.
For 13 years, JPM’s highest PE ratio is 18.62 while the lowest is 6.07; the median is 11.59 (“JPMorgan Chase PE Ratio,” n.d.). The figures show that with the late PE ratio being 17.24 and given that it is closer to its highest value in the past 13 years, people are more willing than they have ever been to pay for JPM’s share (“JPMorgan Chase PE Ratio,” n.d.). The PE shows that investors have growing confidence that the company will increase its earnings.
Calculating the PE ratio:
PE Ratio = Price of Share / EPS (Diluted) (TTM)
= 152.910000 / 8.87 = 17.24
In comparison with its peers in the banking industry and especially the big four, JPMorgan was in a favorable position; Citigroup, Bank of America, Wells Fargo had PE ratios of 14.36, 19.86, and 94.32, respectively.
Another indicator on whether to buy or sell JPM is the Price to Book (PB) ratio. PB ratio compares the market price of a company to its book value per share. As of March 9, 2021, JPM’s share price is 153.91, while its book value per share for the year ended December 2020 was $80.75 (“JPMorgan Chase PE Ratio,” n.d.). This means that JPM’s PB ratio is 1.89 as of this date. Over the past 13 years, JPM’s lowest PB value was 0.62 while the highest was 1.89; the median over the same period is 1.08. Over the last year, JPM’s average book value per share has grown by 6.3% annually (“JPMorgan Chase PE Ratio,” n.d.). Over the past three years, the book value per share has grown by a rate of 6.4%; over five years, it grew by 5.90%. Compared to its peers in the banking sector, JPM is rated number 1 (“JPMorgan Chase PE Ratio,” n.d.). The verdict is ‘buy’ since the numbers are attractive even against its peers.
The fundamentals are attractive for JPM, but there are other factors why one should consider buying JPM. The macro-environment looks good, with the new administration looking like they will not be implementing stricter regulations (Peters, 2021). The bank is the largest in the US, and its CEO Jamie Dimon is one of the most respected figures in banking. The bank exceeded expectations in its fourth-quarter earnings and has plans to buy back shares worth $30 billion in 2021(Peters, 2021). Moreover, the Biden administration just approved a $1.9 trillion stimulus, and the vaccines against COVID-19 seem to be working with states like Texas already opening up their economies.
Conclusion
JPMorgan is the largest bank in the US and one of the world’s largest by market capitalization and assets managed. The bank has performed remarkably over time and has a long history since it was founded in 1799. There is no doubt that JPMorgan has achieved its vision of becoming the best in the financial world. The bank is ubiquitous world-over and a prestigious organization. One thing that is certain is that JPMorgan will play a critical role in the global economy as it recovers from the detrimental effects of COVID-19.
References
History of our firm. (n.d.). JPMorgan Chase & Co. Web.
JPMorgan Chase PE Ratio (n.d.). Gurufocus. Web.
JPMorgan Chase: CET1 ratio 2019. (n.d.). Statista. Web.
Koch, T. W., & MacDonald, S. S. (2015). Bank management (8th ed.). Cengage Learning.
Peters, B. (2021). Is the biggest bank stock by market cap a buy as stimulus lifts hopes for recovery? Investor’s Business Daily. Web.