EBIT Margin, Net Interest Margin, and Price to Book

In diagnosing growth, we often look at sales, earnings, and cash flow growth. However, margins are also an important variable to gauge growth prospects. I prefer EBIT vs. profit margins because EBIT is less susceptible to accounting tricks (income statement manipulation and extraordinary variances between lines such as tax rates, interest income, share buybacks, etc), which in turn provides a truer snapshot of a company, industry, or sector's operating activities.

Nonetheless, net interest margins are a more applicable analysis tool for financials since a large part of revenues is derived from interest income, while interest paid is a major expense. Net interest margin is the spread between a bank's cost of money and the rate it gets on loans.

Banks in emerging markets such as India's HDFC Bank has been benefiting from the soaring stock market, which provides the bank cheap deposits and higher net interest margin. The bank is a leader in processing payments for those securities transactions. Six out of ten brokerages have their accounts at HDFC Bank.

Meanwhile, price to earnings ratios are not relevant in valuing brokerage firms' shares. The ratio is usually low, reflecting the difficulty in forecasting volatile earnings. The more relevant is price-to-book ratio.