The Importance of Financial Statements
Balance sheets and income statements are essential tools that gauge the performance of the business and prospects. The balance sheet gives a snapshot of a company’s financial status, whereas the income statement evaluates the company’s success over time. With a balance sheet and income statement, organizations are able to know their financial situation and the health of the business. The balance sheet encompasses what a firm owns (assets), what it owes (liabilities, and the equity of the owner, which is the amount of money that was invested in the firm (Sanjay, 2023). The paper focuses on balance sheet accounts and income statement components and how they relate to each other by analyzing the financial report of JPMorgan Chase & Co.
An Overview of JPMorgan Chase & Co.’s Performance
JPMorgan Chase’s total assets for the year ended 2021 were $3733.567 B which was a 10.6% increase compared to those of 2020. The total liabilities of the company increased in 2021 by 11.08% from 2020. Total liabilities of the company have been rising for the five-year period as in 2017 it was $2,277,907, while in 2021 it was $3,449,440.
Balance sheet statements also include retained earnings that are attributable to the shareholders or owners of the business. Owners’ equity in the company has been increasing for five years, from $255,693,000 in 2017 to $294,127,000 in 2021. An increasing trend in the balance sheet is an indication that the company’s performance is improving from one period to another.
Income statements track an organization’s income sources, profitability, costs, and budgets, allowing management to respond to variations in expectations. According to JPMorgan Chase & Co.’s income statement, operating income decreased from $59,562,000 to $46,166,000 in 2022 compared to 2021. Revenues of the company have been increasing from one period to another, from $114,579,000 in 2017 to $142,515,000 in 2019, then the revenue decreased to $127,202,000 in 2021. An increase in revenue from one period to another indicates that the business is on the right track.
Key Financial Ratios Indicating Health and Performance
The bank’s health and performance over the past five years are indicated in the financial information of the financial institution. The non-interest expense ratio increases from one period to another, from 48.74% in 2020 to 51.94% in 2021, which is a good indication that the bank is able to meet the interest expense on debts with the generated operating income (CFI Team, 2023). That means that the business has a better capacity to cover interest expenses.
The tax ratio of the company increased from one period to another, from 8.87% in 2017 to 10% in 2021, indicating that the institution has a better income-generating capacity for the assets that it possesses and better efficiency in terms of management. The net interest margin of the financial institution increases from one period to another, from 4.3% in 2017 to 5.46% in 2021, which is an indication that the business creates high net interest income coming from credit products such as mortgages and loans that it offers in the market (CFI Team, 2022a). An increase in a ratio from one period to another indicates an improvement in performance in the financial institution.
CAMEL Ratings and JPMorgan’s Strengths
Different factors affect the CAMEL ratings of the banks under analysis. The capital adequacy of the three banks is determined by the interest and dividend rules and practices that the bank observes (JPMorgan Chase, 2021). The three banks have high asset quality since they have high loan quality, reflecting the earnings of each institution, an indication that each bank is stable when faced with certain risks (CFI Team, 2022b).
Management assessments refer to the ability of each bank to react to any arising financial stress adequately. For five years, the bank has been able to sustain its activities, expand, and have a competitive advantage in the market that it serves. The liquidity credit ratings indicate that it increases as a result of the issuance of long-term debt in the institution. The business also has unencumbered marketable securities, such as debt securities and equity, that the management believes would raise liquidity.
References
CFI Team. (2023). Non-interest expense. Corporate Finance Institute. Web.
CFI Team. (2022a). Net interest margin. Corporate Finance Institute. Web.
CFI Team. (2022b). CAMEL rating system. Corporate Finance Institute. Web.
JPMorgan Chase. (2021). Financial highlights – JPMorgan Chase. JPMorgan Chase. Web.
Sanjay, V. (2023). Difference between balance sheets and income statements. Business News Daily. Web.