The Motley Fool

What These Ratios Tell Us About Barclays PLC

Before I decide whether to buy a bank’s shares, I always like to look at its return on equity and its core tier 1 capital ratio.

These core financial ratios provide an indication of how successful a bank is at generating profits using shareholders’ funds, and of how strong its finances are. As a result, both ratios can have a strong influence on dividend payments and share price growth.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Today, I’m going to take a look at Barclays (LSE: BARC) (NYSE: BCS.US), to see how attractive it looks on these two measures.

Return on equity

The return a company generates on its shareholders’ funds is known as return on equity, or ROE. Return on equity can be calculated by dividing a company’s annual profit by its equity (ie, the difference between its total assets and its total liabilities) and is expressed as a percentage.

The fallout from the financial crisis and the PPI scandal have meant that Barclays share price has risen by just 9% over the last five years, while its dividend has been slashed from 11.5p (2008) to 6.5p (2012). This weak performance is reflected in its return on equity, too:

Barclays 2008 2009 2010 2011 2012 Average
ROE 12.7% 6.3% 7.3% 5.6% -1.9% 6.0%

Value vs. risk

Like Royal Bank of Scotland, Barclays currently trades at a discount to its tangible asset value per share, making it a potential value opportunity for long-term investors. However, these discounted valuations imply above-average levels of risk — in this case, the risk that the banks’ assets will suffer further write-downs.

One way of assessing this risk is with a bank’s core tier 1 capital ratio, which compares the value of the bank’s retained profits and equity with its loan book.

In the table below, I’ve listed Barclays’ core tier 1 capital ratio, ROE and discount to book value, alongside those of its UK-focused peers, Lloyds Banking Group and RBS.

Company Discount to tangible
asset value
Core Tier 1
Capital Ratio
5-year
average ROE
RBS 38% 10.8% -7.8%
Lloyds -20% 12.5% 1.6%
Barclays 16% 11.0% 6.0%

The figures above suggest to me that while RBS is offers the biggest value opportunity, it is also the highest risk. Safer Lloyds already looks fully priced, but Barclays offers an attractive discount to book value and a prospective 2.5% dividend yield. It also has the highest five-year average ROE.

Buy Barclays

I believe that Barclays remains a firm buy at current prices, providing an attractive balance between risk and reward.

Analysts expect the bank to deliver earnings of around 36p per share this year, and to raise its dividend by more than 10%, which could prompt further growth in its share price. However, if you already hold Barclays stock, then you might be interested in learning about five star shares that have been identified by the Fool’s team of analysts as 5 Shares To Retire On.

I own three of the shares featured in this free report, and I don’t mind admitting they are amongst the most successful investments I’ve ever made.

To find out the identity of these five companies, click here to download your copy of this report now, while it’s still available.

> Roland does not own shares in any of the companies mentioned in this article.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.