A Simple Economic Lens to See Through Ratio Noise
Why most ratio analysis fails senior bankers
Ask ten bankers which ratios matter and you will get twenty answers.
ROE, ROA, EBITDA margin, leverage, coverage, liquidity, turnover. Each bank, team, and credit committee carries its own preferred set. Over time, ratio analysis becomes crowded, biased, and mechanical. Analysts calculate more, yet understand less.
The problem is not a lack of ratios.
The problem is a lack of economic structure.
What most ratio frameworks miss is this simple question:
How does a business convert capital into economic value?
This is where the Capital-to-Value Engine comes in.
—
What is the Capital-to-Value Engine?
The Capital-to-Value Engine is a 2×2 financial grid that shows how a firm converts capital into economic value using only four fundamental numbers:
Assets
Equity
Revenue
Net Profit
From these four numbers, all economically meaningful performance ratios can be derived without drowning in complexity.
This is not a replacement for detailed credit analysis.
It is the economic lens that comes before it.
The 2×2 Grid: One View, Four Anchors
The Capital-to-Value Engine places balance sheet strength and income generation on a single page.
Left side: Capital base
Assets
Equity
Right side: Value creation
Revenue
Net Profit
This structure forces clarity. Capital sits opposite value. Stocks sit opposite flows. Everything else becomes secondary commentary.
—
The Six Ratios That Matter and Why Only Six
From four numbers, only six economically meaningful ratios exist. No more should be added.
1. Return on Equity (Net Profit ÷ Equity)
This is the ultimate value creation metric. It answers one question only: Is capital being rewarded for the risk it bears?
—
2. Return on Assets (Net Profit ÷ Assets)
ROA strips away capital structure and tests the economic productivity of the business model itself.
Is the firm good at turning resources into profit?
—
3. Net Profit Margin (Net Profit ÷ Revenue)
Margin captures pricing power, cost discipline, and shock absorption. It is the quiet determinant of resilience.
—
4. Asset Turnover (Revenue ÷ Assets)
Turnover reveals capital intensity. It tells you how hard the asset base is being worked.
—
5. Financial Leverage (Assets ÷ Equity)
Leverage is not a sin. It is a choice. This ratio reveals how aggressively capital is being amplified.
—
6. Equity Turnover (Revenue ÷ Equity)
Often ignored, this ratio is critical. It shows how much business volume is being pushed through each unit of shareholder capital.
High growth ambitions always show up here first.
—
Why This Is an Engine, Not a Checklist
Traditional ratio analysis is static.
The Capital-to-Value Engine is causal.
ROE does not stand alone. It is produced by three forces:
Margin
Asset intensity
Leverage
When ROE disappoints, the engine tells you why.
Low ROE caused by weak margin is a business problem.
Low ROE caused by weak turnover is a capital allocation problem.
High ROE driven by leverage is a risk posture, not an achievement.
This is second-order thinking from first-order simplicity.
—
Using the Capital-to-Value Engine Across Corporate Structures
The real power of this framework emerges in complex groups.
Place one Capital-to-Value Engine grid next to each legal entity in a corporate structure. Instantly, the organisation chart becomes an economic map.
You can now see:
Which subsidiaries consume capital but create little value
Which entities generate value but lack capital backing
Where leverage is concentrated
Where growth ambitions are misaligned with equity support
Loss making entities are no longer “bad performers”.
They are engines that misconvert capital into value.
This reframing changes credit conversations.
—
How This Fits with Cash Flow Analysis
The Capital-to-Value Engine is intentionally silent on cash.
That is not a flaw. It is discipline.
This framework answers: Does this business deserve capital?
Cash flow frameworks answer: Can this business return capital?
Used together, they prevent the classic banking mistake of confusing liquidity with quality.
—
Why This Matters for Bankers and Credit Committees
Senior credit judgement is not about more data.
It is about seeing structure under pressure.
The Capital-to-Value Engine:
Reduces ratio noise
Forces economic causality
Scales from SMEs to conglomerates
Works equally well in teaching, deal structuring, and portfolio review
It is not another framework.
It is a way of seeing.
—
Suggested Illustrations for the Blog and Training Use
Illustration 1: The Base Capital-to-Value Engine Grid
A clean 2×2 grid showing Assets, Equity, Revenue, Net Profit with arrows forming ROE via margin, turnover, and leverage.
—
Illustration 2: The Engine Breakdown
Overlay ROE decomposition visually: Margin as combustion Turnover as speed Leverage as amplification
Avoid cartoons. Keep it schematic and professional.
—
Illustration 3: Side-by-Side Entity Comparison
Two or three grids placed next to each other showing different subsidiaries. Use subtle colour cues to show strong and weak engines.
—
Illustration 4: Corporate Structure with Embedded Engines
A group structure chart where each entity node contains a miniature Capital-to-Value Engine grid.
This is where the framework becomes unmistakably differentiated.
—
Illustration 5: Diagnostic Patterns
Small thumbnails showing archetypes:
High margin, low turnover
Low margin, high leverage
Strong engine, weak cash conversion
