Financial Statement Analysis

- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Cash Flow from Operations Ratio
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score

- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio

- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- CFROI
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula

**Capital Adequacy Ratio –**

**Table of Contents**

## What is Capital Adequacy Ratio?

Capital adequacy is a measure to find out the proportion of banks capital, with respect to the total risk-weighted assets of the bank. The credit risk attached to the assets depends on the entity the bank is lending loans to, for example, the risk attached to a loan it is lending to the government is 0% but the amount of loan lends to the individuals are very high in percentage.

- The ratio is represented in the form of a percentage, generally higher percentage implies for safety. A low ratio indicates that the bank does not have enough capital for the risk associated with its assets and it can go bust with any adverse crisis, something which happened during the recession.
- A very high ratio can indicate that the bank is not utilizing its capital optimally by lending to its customers. Regulators worldwide have introduced Basel 3 which requires them to maintain higher capital with respect to the risk in the books of the company, in order to protect the financial systems from another major crisis.

### Formula

- The total capital which is the numerator in the capital adequacy ratio is the summation of Tier 1 capital of the bank and tier 2 capital of the bank.
- The tier 1 capital which is also known as the common equity tier 1 capital includes mainly share capital, retained earnings, other comprehensive income, intangible assets, and other small adjustments.
- The tier2 capital of a bank includes revaluation reserves, subordinated debt, and related stock surpluses.

- The denominator is risk-weighted assets. The risk-weighted assets of a bank include credit risk-weighted assets, market risk-weighted assets, and operational risk-weighted assets. The ratio is represented in the form of a percentage; generally higher percentage implies safety for the bank.

The mathematical representation of this Formula is as follows –

**Capital Adequacy Ratio Formula = (Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets**

### Examples (with Excel Template)

Let’s see some simple to advanced examples of Capital Adequacy Ratio (CAR) Formula to understand it better.

#### Example #1

**Let us try to understand the CAR of an arbitrary bank in order to understand how to calculate the ratio for banks. For the calculation of CAR, we need to assume the tier 1 and tier 2 capital of the bank. We also need to assume the risk associated with its assets, those risks weighted assets are Credit risk-weighted assets, and Market risk-weighted assets and Operational risk-weighted assets.**

The snapshot below represents all the variables required to calculate the CAR.

For the calculation of Capital adequacy ratio formula, we will first calculate the Total Risk-weighted assets as follows,

4.8 (388 ratings)

Total Risk-weighted Assets = 1200+350+170 =1720

Calculation of Capital adequacy ratio formula will be as follows,

CAR Formula = (148+57) /1720

**CAR will be –**

CAR = 11.9%

The ratio represents the CAR for the bank is 11.9%, which is a pretty high number and is optimal to cover the risk it is carrying in its books for the assets it holds.

#### Example #2

**Let us try to understand the CAR for State Bank of India. For calculation of Capital Adequacy Ratio (CAR), we need the numerator which is the tier 1 and tier 2 capital of the bank. We also need the denominator which is the risk associated with its assets, those risks weighted assets are Credit risk-weighted assets, Market risk-weighted assets, and Operational risk-weighted assets. **

The snapshot below represents all the variables required to calculate the CAR formula.

For the calculation of Capital adequacy ratio, we will first calculate the Total Risk-weighted assets as follows,

Calculation of Capital adequacy ratio will be as follows,

CAR Formula = (201488+50755) / 1935270

**CAR will be –**

Capital Adequacy Ratio = 13.0%

#### Example #3

**Let us try to understand the CAR for ICICI. For the calculati0n of Capital adequacy ratio, we need the numerator which is the tier 1 and tier 2 capital of the bank. We also need the denominator which is the risk-weighted assets.**

The snapshot below represents all the variables required to calculate the Capital adequacy ratio.

For the calculation of Capital adequacy ratio, we will first calculate the Total Risk-weighted assets as follows,

Total Risk-weighted assets =5266+420+560 = 6246

Calculation of Capital adequacy ratio will be as follows,

CAR Formula = (897+189) / 6246

**CAR will be –**

Capital Adequacy Ratio =17.39%

The ratio represents the CAR for the bank is 17.4%, which is a pretty high number and is optimal to cover the risk it is carrying in its books for the assets it holds. Also, find below the snapshot for the company reported numbers.

### Relevance and Use of Capital Adequacy Ratio Formula

CAR is the capital which is set aside by the bank that acts as a cushion for the bank for the risk associated with the assets of the bank. A low ratio indicates that the bank does not have enough capital for the risk associated with its assets. Higher ratios will signal safety for the bank. This plays a very important role in analyzing banks globally post-subprime crisis.

A lot of banks have been exposed and their valuation plummeted as they were not maintaining the optimal amount of capital for the amount of risk they had in terms of credit, market and operational risks in their books. With the introduction of Basel 3 measure, the regulators have made the requirements far more stringent from earlier Basel 2, in order to avoid one more crisis in the future. In India a lot of public sector banks have fallen short of CET 1 capital and the government has been infusing these requirements over the last few years.

You can download this Excel Template from here – Capital Adequacy Ratio Formula Excel Template

### Recommended Articles

This has been a guide to Capital Adequacy Ratio Formula. Here we discuss how to calculate Capital Adequacy Ratio (CAR) with the practical examples and downloadable excel sheet. You can learn more about accounting from the following articles –

## Leave a Reply