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 |
