Cost to Income Calculator: Where Each Line Comes From

The arithmetic the calculator performs is one division, done twice. Nothing about it is difficult and nothing about it is surprising. Which three lines go into the division, and not the division itself, decides whether the answer is worth anything. The whole of the difficulty lives in finding those three lines. The division below therefore gets a paragraph, and the notes on where each figure is found get a section each.

Three figures go in. Operating expensesThe cost of keeping the place operating for one period: salaries, rent, technology and the rest of it, struck before any charge for loans going bad and before tax. is what it costs to run the place. Net interest incomeWhatever survives of the interest line once the lender has paid for the money it lends, measured across one period. is what is left of the interest after the lender has paid for its funding. And other incomeAnything the institution earned over the period that is not interest: fees, commissions, charges, gains on things it sold. is everything earned that is not interest. Four figures come out. The map below shows which output each input can move, and the third input never reaches the fourth output at all.

What does this calculator work out?

Four figures out of three, and the shortest way to see which is which is to run it once by hand. Take the numbers of Suvarna Commercial Bank Limited for one stated year. Rs 5,040 crore of operating expenses. Rs 7,440 crore of net interest income. Rs 2,400 crore of other income. Add the two income lines and total income is Rs 9,840 crore. Divide Rs 5,040 crore by Rs 9,840 crore and the ratio is 51.22 per cent. Take that from a hundred and the margin is 48.78 per cent. Divide the same Rs 5,040 crore by Rs 7,440 crore instead and the like-for-like reading is 67.74 per cent. Suvarna Commercial Bank spends a shade over half of everything it takes in on running itself, and a bit over two thirds of the interest line alone.

The ratio and the margin are not two findings, they are one division read from its two ends. Every rupee of total income either went on running the place or survived as operating profitWhat survives of total income once the running costs are taken off, and before anything is set aside for loans going bad. The calculator stops there., and there is no third destination for it at this height of the statement. The drawing under the calculator is therefore a single bar with a cut in it rather than two separate bars. The margin is taken from the ratio the calculator has already rounded for display, rather than rounding the two apart. Round them separately and a figure landing on an exact half prints a pair adding to 100.01, and the panel would then argue against the identity it is there to show.

There is a fourth output and it looks redundant. The calculator prints total income back even though both halves of it were supplied at the input boxes. Almost every wrong cost to income figure in circulation is wrong in its denominator rather than in its arithmetic, and a denominator that can be seen is a denominator that can be checked. A reader looking at Rs 9,840 crore in an output box, next to a statement that says Rs 9,840 crore, has just checked the most fragile part of the calculation for free. The reconciliation line beneath the panel does the same job from the other end, adding the two income lines back up and then adding the expenses and the operating profit back up. Both routes to the denominator arrive at the same figure.

Press the Rukmini button and watch the fourth output. At Rukmini Finance Limited operating expenses are Rs 540 crore and net interest income is Rs 1,386 crore. The record gives it no other income at all, and a zero goes into that box. Total income is Rs 1,386 crore, the ratio is 38.96 per cent, the margin is 61.04 per cent, and the like-for-like reading is 38.96 per cent as well. The two readings have landed on the same number, and that coincidence is the single most useful thing this calculator reports. Hold on to it. Why there are two readings at all is where that coincidence pays off.

Where is the operating expenses line found?

The operating expenses line comes with a field noteA line stating where a figure is found in a document, rather than what the figure means once it is in hand. rather than an explanation. The note says where the number sits and what sits near it, and it stops there. The ratio's actual meaning is covered separately.

Operating expenses sit on the income statement, below the income lines and above the line for provisionsAmounts a lender sets aside against loans it expects will not be repaid in full. Provisions sit below operating expenses on the statement.. Some statements print a single line and name it operating expenses. Others split it in two, typically staff costs and other operating expenses, and where they do, the two are added and the total entered. The numerator is the whole cost of running the institution for the period. A split presentation is therefore something to add up rather than something to choose between. Three neighbouring lines stay out, and each of the three has been typed into this box by somebody. Interest expended sits above with the income lines, already taken off inside net interest income. Provisions sit below. Tax sits below that again.

Where is net interest income found, and what if only the two interest lines are given?

Some statements print net interest income as a line of its own, and where a statement does, that line is the figure. Where it does not, the figure is a subtraction: interest earned less interest expendedWhat the lender paid over the period for the money it uses, whether that money came from depositors or from borrowing in the market., both of them printed on the same statement above the operating expenses line, both for the same period. At Suvarna Commercial Bank Limited that is Rs 18,600 crore less Rs 11,160 crore. The answer is Rs 7,440 crore, and Rs 7,440 crore is what the box wants.

The single most expensive habit at this box is reaching for the first interest figure on the statement instead of doing the subtraction. Interest earned is printed at the top, it is large, it has the word interest in it, and it is not the input. The calculator has no way of knowing which figure was entered. Rs 18,600 crore is a perfectly ordinary number for that box to receive and it will be processed without complaint. The failure block below therefore works this one all the way through in rupees.

Where is other income found, and what happens when there is none?

Other income carries whatever the institution earned over the period that was not interest: fee incomeMoney earned for doing something rather than for lending: arrangement charges, commissions on selling somebody else's product, account and transaction charges., commissions, charges, gains on things it sold. Other income is printed on the income statement alongside the interest lines, above the operating expenses line. Take the figure for the same period as the other two and enter it.

Some lenders have none of it at all. Rukmini Finance Limited is one: the record gives it no other income whatsoever. Enter a zero rather than leaving the box empty, and then read the two outputs. The answer is a finding about the lender and not a quirk of the tool. With nothing in that box both denominators are the same denominator. At Rukmini Finance Limited both of them are Rs 1,386 crore, the two outputs collapse onto each other, and the build-up row for other income says so in words as it happens. A collapse means the lender earns nothing outside interest, a real and quite large fact about how it makes money.

Drawn out, the collapse stops looking like a coincidence. The two denominators are not two different measurements of the same lender. The two denominators are one bar with a segment added on, and when the segment is nothing at all the two bars are the same bar.

Why does the calculator return two readings rather than one?

Because a ratio struck on total income and a ratio struck on net interest income alone answer two different questions, and a reader holding one of each usually has no idea that is what they are holding. The everyday version runs like this. Two tea stalls stand on the same street. The first sells tea and nothing else. The second sells tea and also rents a corner of its counter to a courier as a parcel drop. Asked what proportion of takings each spends on running the stall, the second stall gets to divide its costs into tea takings plus the rent from the courier. The first divides into tea takings alone. Neither has done anything dishonest. But comparing the two answers straight across says as much about who has a courier as about who runs a tight stall.

Suvarna Commercial Bank Limited is the stall with the parcel drop. Its published reading, on total income, is 51.22 per cent. Its like-for-like reading, on net interest income alone, is 67.74 per cent. Rukmini Finance Limited has no second stream, so both of its readings are 38.96 per cent. Compare the published readings with each other or the like-for-like readings with each other, and never one of each. Read the wrong pair, 51.22 against 38.96, and the gap looks like 12.26 points. Read the right pair, 67.74 against 38.96, and the gap is 28.78 points. The mismatched comparison understates the distance between these two lenders by 16.52 points, more than the difference it reported.

So which pair belongs side by side? The grid below sets out all four readings and marks the two comparisons that hold together. The two crossed comparisons are not slightly worse than the honest ones. The numerator is the same in both and the denominators are two different things. The crossed pair answers a question nobody asked.

Can that mistake be made on the calculator above?

The mistake can be made here, and the third button on the calculator above makes it. The button puts Rs 18,600 crore into the second box, leaves the other two boxes alone, and that is the whole of the wrong entry.

Three things are worth watching as it lands. The held-reading line under the buttons measures the movement against the reading held before it, and that held reading starts out as the worked example. The published reading falls 27.22 points, from 51.22 per cent to 24.00 per cent, and the word falls is written out because a reader skims past a minus sign and does not skim past a verb. The like-for-like reading falls with it, to 27.10 per cent. The wrong Rs 18,600 crore is the whole of that denominator rather than part of it. And the total income box now reads Rs 21,000 crore.

The third of them is the only guard on the screen. Every percentage the calculator has returned is arithmetically correct, and none of them can be checked against anything. No printed line anywhere says what the ratio ought to be. Total income is different: the statement prints Rs 9,840 crore on its face, and the box says Rs 21,000 crore instead. A wrong denominator is caught by comparing a rupee figure with a document, never by looking at the percentage it produced.

Then produce the other mistake, gentler and easier to catch. Type Rs 6,840 crore into the first box, the Rs 5,040 crore of operating expenses with the Rs 1,800 crore of provisions folded in, and the published reading climbs to 69.51 per cent. Press the first button afterwards to put the calculator back where it started.

How does somebody actually use the two readings?

Picture an analyst with six lenders to lay out on one sheet. The analyst is not looking for a winner but for lenders whose numbers were built the same way. Only those can sit in one column. The two readings do that sorting work for them. Any lender whose two readings collapse onto one number earns nothing outside interest. Any lender whose readings sit far apart earns a large slice of its income from fees. Before the sheet compares anybody with anybody, the gap between a lender's own two readings has already sorted the list into two kinds of business. Suvarna Commercial Bank Limited sits 16.52 points away from itself; Rukmini Finance Limited sits zero points away from itself. The distance is not a scoreboard, it is a filing system.

Somebody inside a lender uses it differently. A finance team watching its own ratio through a year has both figures for its own institution and no denominator problem at all, so the useful thing there is which of the two moved. If the published ratio improved and the like-for-like reading did not, the improvement came from the fee side rather than from anything getting cheaper to run. If both moved together, the movement is in the expense line itself. And a household reading a lender's annual statement out of ordinary curiosity gets the plainest version of all: out of every hundred rupees this lender took in, this many went on running it, and the calculator names which hundred rupees that was.

What does the output not settle?

A great deal. A number in a box carries an authority it has not earned, and that is worth being blunt about. The calculator does not say whether a ratio is high or low. The calculator was never told which trade the institution is in, how many branches it runs, whether it is building something expensive this year or harvesting something built five years ago. A lender that spends heavily on a network it has just laid down and a lender that spends nothing because it has stopped investing can print the same ratio, and this tool cannot tell them apart because it has been shown three numbers and nothing else.

The calculator also sees nothing below operating profit. Provisions and credit costsWhat loans going bad actually cost the lender over the period. Credit costs sit below operating profit and are covered separately. are outside it completely. A lender can look inexpensive to run and still be expensive to own once what it lends starts going wrong. The lower half of the statement is covered separately. And the calculator produces no view about any institution at all, including the two lenders whose figures sit behind its buttons. Neither of them is put forward as well run. Neither ratio is a level anybody ought to be aiming at. The calculator gives a division, done carefully, with its denominator printed in plain sight: Rs 9,840 crore at the bank, Rs 1,386 crore at the finance company.