GEARING RATIO

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It is also known as net gearing ratio and it can be defined as” a measure of financial leverage, which shows the ratio at which firm’s activities are funded by owner’s equity i.e. equity financing with respect to debtor funds. More leverage firm have more than that of less leverage because of more chances of default. It can be calculated by debt-to-equity ratio (total debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and debt ratio (total debt/total assets). However an increase portion of equity shows that company is financially strong. The percentage threshold varies across the countries depending on the national banking regulator.

CAPITAL ADEQUACY RATIO (CAR):
It is defined as a measure of Bank’s capital to its risk. Also known as "Capital to Risk Weighted Assets Ratio (CRAR).” it determines the bank capability to pay its debt obligations’. It is used to protect the depositor’s money thus enhancing the financial system stability and efficiency all over the world. As we know that the higher the ratio the higher the bank provides more protection.

Types of capital:
The Basel rules recognize that different types of equity are more important than others. To recognize this, different adjustments are made: In this two types of capital are measured: TIER 1 CAPITAL: CAPITA - (paid up capital + statutory reserves + disclosed free reserves) (equity investments in subsidiary + intangible assets + current &b/f losses) TIER 2 CAPITAL: it includes A) Undisclosed Reserves, B) General Loss reserves, C) hybrid debt capital instruments and subordinated debts. Where

Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the Credit Conversion Factor. Current assets include categories cash. Leverage ratio: Tier 1 capital/ total average assets Total Risk-Adjusted Capital ratio: Total Risk-Based Capital for certain loans and investments/risk adjusted assets Risk weighting Risk weighted assets . accounts receivable . loans.Fund Based: Risk weighted assets also known as fund based assets e. marketable securities. CURRENT ASSETS: Those assets which can be converted into cash within one year. It tells us about the liquidity position of a firm. In Tier 1 capital bank bear losses without being required to cease trading while in Tier 2 capital . Total Capital to total assets ratio: Tier 1 capital + tier 2 capital/ total average assets. investments and other assets.g. Degrees of credit risk expressed as percentage weights have been assigned by RBI to each such assets.Risk can either be weighted assets ( ) or the respective national regulator's minimum total capital requirement. prepaid expenses. and inventory. Currents assets are important for the . in this bank can bear losses in case of winding up thus providing less protection to depositors than that of tier 1 capital. MEASURES OF CAPITAL ADEQUACY: Risk-adjusted capital ratio: Tier 1 capital/ risk adjusted assets. short-term investments. cash. This will then have to be again multiplied by the relevant weight age.

to 0.to 0. equity and assets.businesses as they takes part in day. and inventory. If the current assets becomes falls the company finds sources of funds either by issuing shares or by getting debt.Fund Based: Risk weighted assets also known as fund based assets e. the company becomes more risky. It tells us about the liquidity position of a firm. Investors used many ratios to calculate leverage but the important factors include debt. short-term investments. If the current assets becomes falls the company finds sources of funds either by issuing shares or by getting debt. This will then have to be again multiplied by the relevant weight age. investments and other assets. loans. Current assets typically include categories such as cash. Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the Credit Conversion Factor. LIQUIDITY RATIO: It is the ratio of the current assets to current liability. .day operations. interest expenses. Leverage Ratio: It determines the company’s ability to pay its debt. marketable securities. Degrees of credit risk expressed as percentage weights have been assigned by RBI to each such assets. These ratios help an investor to judge the weak areas of the company. Currents assets are important for the businesses as they takes part in day. prepaid expenses. CURRENT ASSETS: Those assets which can be converted into cash within one year. accounts receivable . The more the debt. Risk weighted assets .day operations.g. LIQUIDITY RATIO: It is the ratio of the current assets to current liability. cash.

B. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period. equity and assets. Variation in ROE formula: There are several variations on the formula that investors may use: A. There are many ratios to calculate leverage but the important factors include debt.preferred dividends / common equity.Leverage Ratio: It determines the company’s ability to pay its debt. Then. interest expenses. These ratios help an investor to judge the weak areas of the company. the company becomes more risky. Average shareholders' equity= shareholders' equity at the beginning of a period to the shareholders' equity at period's end/2 C. Return on common equity (ROCE) = net income . the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. . Change in ROE for a period change in ROE for a period change in ROE for a period the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. The more the debt.