Capital Adequacy
It is vital for a bank to maintain investors’ confidence and preventing the bank from bankrupt. It shows the overall financial condition of banks and also the ability of administration to overcome the need of additional capital (Prasad and Ravinder, 2012). Capital adequacy is measured by the degree of money to hazard weighted holdings. A solid capital adequacy proportion reinforces the confidence of investors in the bank. It is a measure of a bank's ability to meet its obligations relative to its exposure to risk. The capital sufficiency proportion exists to guarantee that a bank has the capacity handle misfortunes and satisfy its commitments to account holders without stopping operations.
Capital ampleness is a critical parameter
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Also, it is the responsibility of financial managers to retain adequate levels of capitalization. Moreover, if the banks absorbing unanticipated shocks, it indicates that the institution will continue to honor its obligations. The capital adequacy ratio is most widely used to assess the performance of the banks. According to the state bank of Pakistan, a minimum 10 percent CAR is required. Capital Adequacy can be the percentage ratio of a monetary organization's primary capital to its resources (advances and investments), utilized as a measure of its monetary strength and stability (Ogege, Williams and Emerah, …show more content…
All the more particularly, this decides the ability to absorb misfortunes, fund its extension, pay profits to its shareholders, and develop an adequate level of capital. Being front line of defense against the destruction of a capital base from misfortunes, the requirement for high profit and earnings can scarcely be overemphasized. Although diversifying pointers are utilized to fill the need, the best and most broadly utilize indicator is a Return on Assets (ROA). ROA is employed by establishments and banks to outfit them with an important instrument for evaluating their progress, including utilization of assets and financial quality (Haque, 2014). Then again, for inside and out examination, an alternate pointer Net Interest Margins (NIM) are likewise utilized. Chronically unfruitful money related establishment’s hazard bankruptcy. Contrasted and most different pointers, inclines in gains can be hard to decipher for cars, abnormally high benefit can reflect excessive danger
In this case, the reader learns that liquidity is a better than average. The ratio and cash on hand have been better than 2013 from the past years. Moreover, it shows that the hospital has a higher ability to meet its cash obligation because it has more security compared to other hospitals. Funding allows hospitals to control funds and limit investments. Not-for-profit organizations help provide more services and margin of safety. Therefore, creditors look for a margin of safety so that the community that financed a small portion of total financing can be returned to the owners by leveraging. Capitalization ratio measures the funds that were borrowed and the assets that have been used. The coverage ratio measures the number that time they fixed financial charges. The time's interest earned ratio shows the ability of the hospital to meet
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
The return on total assets (ROA) is an overall measure of profitability which measures the total effectiveness of management in generating profits with its available assets. This ratio indicates the amount of net income generated by each dollar invested in assets. The higher the firm's return on total assets, the better. Harley Davidson's return on total assets was 14.04% for 2001, 14.27% for 2000. These percentages are high and show an upward trend, this shows strong performance in this area for the past two years.
There is no universal theory of the debt-equity choice, and no reason to expect one. In this essay I will critically assess the Pecking Order Theory of capital structure with reference and comparison of publicly listed companies. The pecking order theory says that the firm will borrow, rather than issuing equity, when internal cash flow is not sufficient to fund capital expenditures. This theory explains why firms prefer internal rather than external financing which is due to adverse selection, asymmetry of information, and agency costs (Frank & Goyal, 2003). The trade-off theory comes from the pecking order theory it is an unintentional outcome of companies following the pecking-order theory. This explains that firms strive to achieve an optimal capital structure by using a mixture debt and equity known to act as an advantage leverage. Modigliani and Miller (1958) showed that the decisions firms make when choosing between debt and equity financing has no material effects on the value of the firm or on the cost or availability of capital. They assumed perfect and frictionless capital markets, in which financial innovation would quickly extinguish any deviation from their predicted equilibrium.
Piketty’s Capital makes the case for a wealth tax on the capital and high labour incomes of the elite. He reasons on both economic and moral grounds as to the effectiveness of this measure to combat the “fatal flaw” of capitalism; its inherent tendency to concentrate wealth in the hands of an elite few. This recommendation comes after 577 pages of deep analytics performed on a dataset of wealth levels and wealth concentrations in France, the United Kingdom and the United States since 1820, 1855 and 1850, respectively. Piketty then derives a wealth-income ratio by dividing wealth at a certain time by corresponding national income to perform a like-for-like comparison across the regions. It pays to note that Piketty makes no distinction between wealth (the stock of one’s assets less liabilities) and capital, this difference is most often minute but can bring up difficulty when considering that capital is valued at its marginal product and wealth at the market
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
It’s mandatory for all the banks to deposit a certain determined percentage of their assets with the central bank to make sure that the banks’ customer deposits are safe. These percentages are what the central bank adjusts to reduce or increase the banking lending ...
The times interest earned ratio uses a company’s income statement to assess its ability to meet long-...
It was the conclusion of the author that financial ratios when combined with statistical analysis still remain a valuable tool. The theoretical conclusion was that ratios used within a multivariate framework take on a more influential role than when used in isolation. The discriminate model was very accurate in the initial sample of 66 firms, correctly predicting 94 percent of the original bankrupt firms. The potential suggested used of the model included: business credit evaluation, investment guidelines and internal control procedures. The MDA model also showed potential to ease some problems in the selection of securities of a portfolio but further investigation was recommended.
Ÿ Capital structure/investment - This information is taking from the Balance sheet, but also from the Profit and Loss Account. This is examining the sources of finance the company has used and also looking at it as a potential investment opportunity. There are certain features, which must be present if financial information is to meet the needs of the user. The two most important features are that: Ÿ The information should be relevant to those who are using it.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
When compared to the physical capital maintenance concept, the financial capital maintenance concept is the better choice for standard setting when distinguishing between a return of capital and a return on capital. The main argument in favor of physical capital maintenance is that it provides information that has better predictive value, confirmatory value, and is more complete. However, due to agency theory, prospect theory, and positive accounting theory, neutrality and completeness under physical capital maintenance would be impaired so gravely that predictive value and confirmatory value become inefficacious. As a result, financial capital maintenance, with its use of historical cost, is able to provide information to decision makers with stronger confirmatory value and predictive value.
In the past, the company performance was measured by asking ‘how much money the company makes?’ To a certain extent, they are right because gross revenue, profitability, return on capital, etc. are the results that companies must bring to survive. Unfortunately, in today business if the management focuses only on the financial health of the company, numerous unwanted consequences may arise.
A variety of groups are concerned in bank profitability for various reasons. The bank shareholders would want to know if the value of their investments is high or low. The investors also use current and past performance to predict future price of the banks’ shares traded on the stock exchanged. The management of the bank as trustee of the shareholders is evaluated and compensated on the basis of how well their decisions and planning have contributed to growth in assets and profits of their banks. Employees of bank also are concerned with profits, since their salaries and promotions are frequently tied to the profitability performance of their banks.