How to interpret Waterfall charts?

Question

Hello everyone!

I have the following chart and I would like to know how to read it. My approach is the following:

Rectangles over _ _ _ _ line represent an increase

Rectangles behind _ _ _ _ line represent a decrease

In this order of ideas:

Margin deterioration decreased by 1.8%
Higher costs decreased by 0.1%
Operating efficiencies increased by 2.3%
Fines and other increased by 0.8%
Capital costs decreased by 0.4%

Is this approach right?

Thank you very much.

Answer 1

Not quite. The waterfall chart breaks down the difference between the left total bar and right total bar into it's drivers. Meaning:

Margin deterioration decreased ROE by 1.8% between 2014 and 2015
Higher risk costs decreased it by a further 0.1%
Increasing operating efficiencies boosted ROE by 2.3%

etc...

All effects combined had a net positive impact of 0.8% on ROE between 2014 and 2015.

Answer 2

Hi Floyd,

Yes, that's right!

Now, just to make sure we're clear on this, in the statement "Margin deterioration decreased by 1.8%", just make sure you understand that this means "Margin deterioration contributed to a 1.8% percentage point decrease in ROE from 2014 to 2015"

Answer 3

All effects that are spaced out in the middle refer to the baseline seen in the very left bar. A transparent way of showing how the rvery right bar came to be.

Doing stacked bars, i.e. combining those views into 1 will only allow you more aggregate and imprecise representations.

Answer 4

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