Remember: the main way banks make money is by charging more to lend than it costs them to borrow. The difference between these two interest rates is captured in one of the most important financial ratios used to analyze banks’ suitability as an investment: net interest margin (NIM). NIM is expressed as a percentage and banks always disclose it in their financial statements, so you never have to worry about calculating it yourself.

At risk of stating the obvious, the higher a bank’s NIM, the better – it means more money is being generated by its deposits and loans. While a bank’s own policies, and particularly the quality of its loan management, play a major role in determining its NIM, the yield curve – a product of the wider “macroeconomic” environment and therefore beyond the bank’s control – is also a highly influential factor. It’s worth taking a minute to make sure you understand this important concept.

If you think about it, a bank borrows money at short-term interest rates (think customer deposits and overnight central bank loans) and then lends that money at long-term rates (think 30-year mortgages, business loans, and so on). A bank’s profit is therefore largely determined by the difference between short-term and long-term rates. The yield curve plots exactly this: how similar bonds’ yields differ based on how distant their maturity dates fall due. When the curve steepens, the difference between short-term and long-term rates in an economy is widening – allowing its banks to increase their NIM.

In addition to looking at it visually, one of the most common ways to assess the steepness of the yield curve is to focus on the difference between 2-year and 10-year US Treasury yields. The “short end” of the yield curve – the 2-year Treasury yield – reflects what moves investors expect central banks to make to interest rates in the near term. The “long end” of the yield curve, meanwhile – the 10-year Treasury yield – reflects longer-term economic growth and inflation expectations: the higher these hopes, the higher long-term yields will typically be. Taken together, this helps explain why banks and bank stocks tend to do well when the yield curve is steepening – when central banks are cutting current interest rates and/or investors’ growth and inflation expectations are increasing.

NIM is useful when measuring a bank’s profitability. When it comes to evaluating performance,, investors often turn to the efficiency ratio. This metric, which is also a fixture of banks’ financial statements, assesses the cost-effectiveness of a bank’s operations by dividing its “non-interest expenses” by revenue – non-interest expenses including things like sales and marketing, salaries, property rent, and so on. When analyzing a bank as a potential investment, it’s always a good idea to compare its efficiency ratio with that of its competitors. The lower the ratio, the better.

A third important area of analysis is banks’ loan portfolios – which makes sense, given that these are their main moneymaker. If you’re considering investing in a bank, look into how the total value of its loans has changed over the past few years – and which sort of customers it’s lending to. A loan portfolio that’s overly concentrated in a particular sector or geography may be a red flag, given its outsized exposure to a single risk reducing the likelihood of repayments. Take a Texan bank with half its portfolio made up of loans to local energy companies, for example – how do you think its stock price performed during the 2015 oil price crash?

On a related note, banks actually set aside cash to cover potential future defaults by borrowers. These loan loss provisions reflect a bank’s overall estimate of future uncollected loan payments due to borrowers not being able to pay. Loan loss provisions are also reported in banks’ financial statements and are worth paying attention to: growing provisions are rarely a good sign. You can divide loan loss provisions by total loans to work out a percentage figure that’s easier to compare across different banks. The lower the percentage, the better.