The yield on assets is a popular financial solvency ratio that compares a financial institution’s interest income to its earning assets. Yield on earning assets (YEA) indicates how well assets are performing by looking at how much income they bring in. As a measure of effectiveness, yield on assets can be useful for comparing different managers relative to their asset bases.
Managers (or entire businesses) that can generate sizable yield (cash flow) with a small asset base are considered to be more efficient, and likely offer more value.
Breaking Down Yield On Earning Assets
Banks and financial institutions that provide loans and other investment options that offer yields have to strike a balance between the different types of investment vehicles, duration, and markets that it allows for loans to. Generally speaking, the higher a company’s loan to asset ratio, the higher its yield on returning assets. This is because higher-yielding investment vehicles bring in more income relative to the amount of money on loan.
High yield on returning assets is an indicator that a company is bringing in a large amount of dividend and investment income from the loans and investments that it makes. This is often the result of good policies, such as ensuring that loans are appropriately priced, and investments are properly managed, as well as the company’s ability to garner a larger share of the market.
Financial institutions with a low yield on earnings assets are at an increased risk of insolvency, which is the reason the YEA is of interest to regulators. A low ratio means that a company is providing loans that do not perform well since the amount of interest from those loans is approaching the value of the earning assets. Regulators may take this as an indicator that a company’s policies are creating a scenario in which the company will not be able to cover losses, and could thus become insolvent.
Increasing a Low Yield On Assets
Increasing a low YEA often involves a review and restructuring of a company’s policies and approach to risk management, as well as a review of the general operations of how the company chooses which loans to provide to which markets.
Depending on the business or strategy, at times, yield on assets may need to be adjusted for various methods of compiling financial statements. For instance, certain off-balance sheet items could distort reported yield on assets when using financial statements that have not been adjusted.