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# Reserves to Capital Ratio:

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This ratio establishes relationship between reserves and capital. Higher proportion of reserves shows financial soundness because:
• Unit shall be able to meet future losses as and when suffered.

• Unit can grow, expand, diversify as it may desire.

## Formula:

The ratio is calculated with the help of following formula:

Reserves to capital ratio =  Reserves / Capital

## Example:

Total reserves = \$5000

Capital = \$15000

Required: Calculate reserves to capital ratio.

### Solution:

Reserves to capital ratio =  Reserves / Capital

= \$5000 / \$15000

= 0.33

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