The Texas ratio is a measure devised by noted bank analyst, Texas investor and author James Edwards, to give investors an idea of a bank’s financial stability. It is a simple measure, yet powerful in what it can tell investors about their banking partners.

The Texas ratio is calculated by adding two components, non-performing assets and tangible common equity and loan loss reserves, and dividing the total non-performing assets by the total tangible common equity and loan loss reserves.

Non-performing assets are defined as any loans, leases, securities and other loans that are in arrears or have been in arrears for 90 days or more, and are unlikely to be repaid or otherwise resolved in the near future. Essentially these non-performing assets are loans or other investments which have become bad investments, and the bank is unlikely to recover all or most of the money it has invested in these bad investments.

Tangible common equity and loan loss reserves is a measure of the liquid and tangible assets held by the bank, such as cash, investments, and marketable securities, as well as reserves that the bank has set aside to cover or mitigate losses from bad investments.

The Texas ratio is commonly used as a measure to compare banks, as it can provide a quick and easy assessment of a bank’s financial health. Generally, the higher the Texas ratio, the more troubled the bank may be, as the ratio will be indicative of the bank's ability to cover its non-performing assets.

A high Texas ratio, however, does not necessarily mean the bank is doomed. It simply indicates that the bank is facing a higher degree of risk and may need to look at ways to better manage its bad investments and reserves to ensure a healthier financial position.

Many investors view the Texas ratio as the key indicator of a bank’s stability. While other measures such as the Bank Asset-Liability Ratio or the Cash Ratio may give a better understanding of the financial position of a bank, the Texas ratio is still widely used and can provide investors with a general idea of the stability and performance of a bank.