reserve asset ratio

Меры оценки производительности и ликвидности компании — COFU Trading

reserve asset ratio

Все меры оценки ликвидности и производительности компаний считаются на основе двух документов: бухгалтерского баланса и отчета о прибыли компании.

Но перед тем как перейти к описанию этих мер, необходимо сначала разобраться с терминами.

Я не буду сильно углубляться в пояснения этих двух документов, просто опишу их составляющие, как они называются на русском и английском языках, чтобы в дальнейшем было проще искать данные по компаниям в интернете.

Упрощенно бухгалтерский баланс можно отобразить в виде схемы, изображенной на рисунке.

Fixed assets (FA) — основные средства компании:

  • Нематериальные активы (intangibles) — то, что не имеет физического присутствия, например «goodwill».
  • Чистые основные средства (net fixed assets) — большие, дорогие физические объекты, такие как недвижимость.
  • Инвестиции (investments) — часто это акции других компаний.

Current Assets (CA) — оборотные активы, т.е. те активы, которые обернутся в кэш быстрее чем за 12 месяцев:

  • запасы (stocks, inventories) — сырые материалы, конечный продукт, и т.п.
  • дебиторская задолженность (account receivable) — деньги, полученные с продаж товаров.
  • денежные средства (cash) — обычно это небольшие суммы, т.к. у компаний нет целей просто держать большие суммы в виде наличных. Но высокий уровень кэша может свидетельствовать о намерениях совершения больших покупок, например покупки другой компании.
  • все остальное (miscellaneous).

Owners Funds (OF) — Акционерный капитал (деньги владельцев компании):

  • обыкновенные акции (issued common stocks) — основной способ привлечения денег в бизнес.
  • резервы капитала (capital reserves) — доходы от не торговой деятельности (разница курсов валют в торговом балансе, переоценка фиксированных активов, премии акций, выпущенных по цене выше номинальной).
  • нераспределенная прибыль (revenue reserves) — дивиденды держателям акций и т.п.

Long-Term Loans (LTL) — долгосрочные займы (более чем на один год).

Current Liabilities (CL) — краткосрочные обязательства — все то, что должно быть выплачено в течение года: налоги, дивиденды, оплата за сырье и т.п.

Total Assets (TA) — сумма всех активов или сумма всех пассивов.

Capital Employed (CE) — используемый капитал.

CE = OF + LTL = FA + CA — CL.

Net Worth (NW) — то что принадлежит владельцам компании, т.е. берем все активы компании и вычитаем все обязательства перед третьими лицами.

NW = FA + CA — CL — LTL = OF.

Working Capital (WC) — является мерой ликвидности, т.е. мерой доступности кэша для покрытия текущих нужд компании.

WC = CA — CL = OF + LTL — FA.

Вычитая операционные расходы из продаж компании, мы получаем EBIT — грубо говоря это доход перед уплатой всех обязательств. После чего мы последовательно получаем еще несколько показателей, таких как EBT, EAT и RE. Все пояснения на картинке, не будем на этом останавливаться.

Сочетая EBIT, EBT и EAT с TA, CE и NW в разных комбинациях, мы получаем разные меры оценки производительности компании. Самые важные из них — это ROTA и ROE.

ROTA

Отражает эффективность всей компании, так как учитываются абсолютно все показатели.

Return on Total Assets (ROTA) = EBIT/TA

Еще один способ определения

ROTA = Profit Margin * Asset Turn,

где Profit Margin (Gross Margin) = EBIT/Sales

Asset Turn = Sales/TA

Примеры:

Если Asset Turn = 2.00, это означает, что для поддержания продаж на 1$ необходимо 1/2.00 = 0.5$.

Если Asset Turn = 0.4, это означает, что для поддержания продаж на 1$ необходимо активов на 1/0.4 = 2.5$, что очень много.

Выгоднее инвестировать и иметь бизнес с показателем Asset Turn = 2.00, чем с 0.4.

Для роста ROTA необходимо либо снижать издержки, которые влияют на показатель Profit Margin через EBIT, либо понижать TA, который влияет на Asset Turn. Таким образом, можно предположить, что снижение индекса цен производителей (PPI), приведет к росту ROTA компаний, закупающих сырье для своего производства.

Чем выше значения Sales Margin и Asset Turn, тем больше возврат для держателя акций такой компании.

ROE

Эффективность для держателей акций (владельцев компании). Это самый важный показатель эффективности бизнеса. Основным двигателем ROE является ROTA.

Return on Equity (ROE) = EAT/OF

Важно понимать, что очень высокие значения ROE и ROTA не могут держаться долго, так что в компаниях с высокими значениями можно ожидать их снижение.

ROE «управляет» стоимостью компании. Да, этот показатель является краткосрочной характеристикой, но из всех индикаторов он самый важный.

Инвесторы покупают «будущую стоимость» компании. Если перспективы роста хорошие, это обещает хорошую прибыль. Однако есть и риски, поэтому инвесторы оценивают перспективы по следующей схеме:

1.       оценка экономики вцелом;

2.       оценка секторов (индустии);

3.       оценка конкретной компании.

Основными показателями, которые влияют на ROE, являются ROTA  и Debt/Equity Ratio.

Меры оценки ликвидности компании читаются на основе бухгалтерского баланса. Норма для всех индикаторов ликвидности постоянно меняется со временем, здесь присутствуют тренды, нежели абсолютные значения.

Current Ratio

Это соотношение показывает доступность средств у компании для покрытия краткосрочных обязательств. Значение выше единицы считается хорошим. Но некоторые предприятия могут чувствовать себя хорошо и при значениях меньших единицы.

Current Ratio = [Current Assets] / [Current Liabilities]

Смотреть на это индикатор в изоляции смысла нет, необходимо смотреть на него в контексте. Кроме этого, нужно сравнивать его с бенчмарком, который можно взять из различных источников:

  • посчитать на основе исторических данных;
  • сравнении с конкурентами;
  • уже готовые расчеты в публикациях и исследованиях.

Quick Ratio

Quick Ratio = [Current Assets — Inventories] / Current Liabilities

В данном случае мы исключаем из расчетов запасы, так как это показатель ликвидности, а у некоторых компаний могут возникнуть трудности с преобразованием запасов в наличку. Например, танкер с нефтью, который стоит в порту, проще перевести в кэш, чем такой же танкер с одеждой.

50% компаний индекса SnP500 попалает в диапазон [0.5 … 1.1]. Значение Quick Ratio = 1.0 — это очень хороший показатель, но большинство компаний считает, что нет смысла в таком уровне ликвидности.

Если Current Ratio стабилен, а Quick Ratio сильно падает — это плохой знак. Это означает, что запасы накапливаются за счет наличных и денежных поступлений.

Current Ratio и Quick Ratio — самые популярные индикаторы ликвидности, но у них есть недостаток — они актуальны на дату формирования бухгалтерского отчета. Существует другой индикатор, который может быть более полезным в определении того, способна ли компания в моменте заплатить по всем обязательствам. Он называется «Working Capital to Sales».

Working Capital to Sales

Это более динамичный индикатор, по которому можно отслеживать тренды, т.к. в его основе лежат данные из PnL отчета компании.

Working Capital to Sales Ratio = [Current Assets — Current Liabilities] / Sales

Если продажи компании растут, то Working Capital to Sales Ratio падает. Это может происходить, если компания растет слишком быстро, или если в ней изначально было недостаточно денег. В любом случае повышается риск банкротства. Выходом из такой ситуации может быть инъекция так называемых Long-term Liquid Funds.

Debt to Equity Ratio (D/E)

Это один из самых фундаментальных показателей. Есть три способа его расчета:

  1. используя только долгосрочные займы;

  2. долгосрочные + краткосрочные займы;

  3. долгосрочные + все обязательства.

Самый популярный — второй способ, но автор книги, на основе которой написана эта статья, предпочитает использовать все обязательства в расчете. Но в принципе разницы нет как считать.

Есть так же несколько методов подсчета D/E:

D/E = [LTL + STL] / OF

D/E = [Total Debt] / [Total Funds] = [LTL + CL] / [LTL + CL + OF]

Первый метод самый популярный, но второй удобнее, так как он отражает долг в процентом соотношении ко всем активам компании.

Чем выше уровень долга компании, тем выше риски этой компании, ей необходимо выплачивать проценты по долгам, а это создает исходящий денежный поток из компании. Но зачем компании берут сверх риск? Наращивая долг, они увеличивают свою доходность, так растет стоимость их акций, растет доход владельцев компании и увеличивается потенциал для будущего роста компании.

Нормальное значение уровня долга зависит от сектора. В компаниях с предсказуемым доходом (например лизинг) уровень долга выше, чем у компаний с волатильным доходом (например, добыча полезных ископаемых).

Рост долга с одной стороны приводит к росту доходов держателей акций, но с другой стороны повышает риски для компаний.

За счет повышения долга можно завышать показатель ROE. Ниже приведены примеры с нулевым долгом и с D/E = 20% (при процентной ставке 10%).

Увеличение плеча повышает доходность (ROE), но и риски повышает тоже. И чем выше Debt, тем выше ROE. Поэтому важно понимать, что высокий ROE компании может быть сопряжен с высоким долгом (риском).

Незначительный рост процентных ставок приводит к снижению ROE. При росте ставок EBT компаний падает, и тогда ROE будет падать быстрее у тех компаний, у которых D/E выше.

Источник: https://www.cofutrading.com/trading-journal/2018/meri-ocenki-proizvoditeljnosti-i-likvidnosti-kompanij

Reserve Ratio — Overview, Impact on Bonds and Stocks, Monetary Policy

reserve asset ratio

The reserve ratio – also known as bank reserve ratio, bank reserve requirement, or cash reserve ratio – is the percentage of deposits a financial institution must hold in reserve as cash.

The central bank is the institution that determines the required amount of reserve ratio. A bank’s reserve usually consists of money it has and is held in its vault.

Banks also have cash kept in their account at the central bank.

Breaking Down the Reserve Ratio

Generally, the reserve ratio is used in monetary policy planning in order to regulate the amount of cash banks can convert to loans.

In addition, central monetary authorities use the ratio to protect banks from a sudden decline in liquidity, which can result in a financial crisis2008-2009 Global Financial CrisisThe Global Financial Crisis of 2008-2009 refers to the massive financial crisis the world faced from 2008 to 2009.

The financial crisis took its toll on individuals and institutions around the globe, with millions of American being deeply impacted. Financial institutions started to sink, many were absorbed by larger entities, and the US Government was forced to offer bailouts.

Although some countries Australia and the U.K have no reserve ratios, others, such as Lebanon and Brazil, have a reserve ratio of 30% and 20%, respectively. The figures are important because they ensure that each country is able to regulate and protect its economy.

Impact of the Reserve Ratio on Bonds and Stocks

A higher interest rate hurts bond owners, as interest rates have an inverse relationship with the value of bonds. The stock market also tends to behave negatively when interest rates surge since it’s more expensive for companies to acquire the desired level of financing. Consequently, raising the reserve requirement hurts bonds and stocks.

A higher ratio appears when the economy is experiencing inflation, while a lower ratio is experienced during a deflationDeflationDeflation is a decrease in the general price level of goods and services. Put another way, deflation is negative inflation. When it occurs, the value of currency grows over time.

Thus, more goods and services can be purchased for the same amount of money..

In particular, banks have a hard time when the central bank adjusts the reserve ratio upward because there is a limit to the amount of money banks can lend and, therefore, to the amount of interest they can earn. The reverse is true when the central bank lowers the reserve ratio. Banks have more money to lend, and more interest is generated.

In certain countries, some amount of money is paid to banks as interest on their reserves. The practice is usually beneficial to banks, but it depends on prevailing rates. For example, the U.S.

Federal ReserveFederal Reserve (The Fed)The Federal Reserve is the central bank of the United States and is the financial authority behind the world’s largest free market economy. pays about 0.

5% on reserve ratios as compensation to banks for income lost when the reserve requirement is increased.

Investor Considerations

International investors need to keep a close eye on reserve ratios, especially in markets that rely on reserve requirements to manage monetary policies. In many cases, stockholders are able to tell when variations in reserve ratios will take place by scrutinizing macroeconomic patterns.

A country whose inflation is rising will typically experience a rise in its reserve ratio. An investor can hedge such risks by investing in multiple regions and countries. An investor can also shift his investments into areas that are not influenced by changes in the ratio.

Impact on Monetary Policy

Most central banks, the Bank of EnglandBank of EnglandThe Bank of England (BoE) is the central bank of the United Kingdom and a model on which most central banks around the world are built.

Since its inception in 1694, the bank has changed from being a private bank that loaned money to the government, to being the official central bank of the United Kingdom., the U.S.

Federal Reserve System, and the European Central BankEuropean Central BankThe European Central Bank (ECB) is one of the seven institutions of the EU and the central bank for the entire Eurozone.

It is one of the most critically important central banks in the world, supervising over 120 central and commercial banks in the member states., tend not to change reserve rates often because it can cause liquidity problems. Instead, they utilize open market operations such as quantitative easing.

For example, the reserve ratio in the U.S. is limited to 10% for deposits and 0% for time deposits spanning many years. The figures are discussed and set by a board of governors. time deposits, savings accounts are not affected by reserve requirements.

Increasing the percentage of deposits that banks must keep in the form of vault cash causes a decrease in the amount of lending that they are able to do.

 While the effectiveness of reserve requirements as a policy tool is highly debatable, there’s little doubt that it influences the money market. Their use is becoming less relevant in countries such as the U.S.

, where regulators preferring quantitative easing instead.

More Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™FMVA® CertificationJoin 350,600+ students who work for companies Amazon, J.P. Morgan, and Ferrari certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Foreign Exchange ReservesForeign Exchange ReservesForeign exchange reserves refer to foreign assets held by the central bank of a country. Foreign assets comprise assets that are not denominated in the domestic currency of the country. For example, US government bonds held by the Bank of Japan are foreign assets for Japan.
  • Restricted CashRestricted CashRestricted cash refers to cash that is held onto by a company for specific reasons and is, therefore, not available for immediate ordinary business use. It can be contrasted with unrestricted cash, which refers to cash that can be used for any purpose.
  • Statement of Cash FlowsStatement of Cash FlowsThe Statement of Cash Flows (also referred to as the cash flow statement) is one of the three key financial statements that report the cash generated and spent during a specific period of time (e.g., a month, quarter, or year). The statement of cash flows acts as a bridge between the income statement and balance sheet
  • Quantitative EasingQuantitative EasingQuantitative easing (QE) is a monetary policy of printing money, that is implemented by the Central Bank to energize the economy. The Central Bank creates

Источник: https://corporatefinanceinstitute.com/resources/knowledge/finance/reserve-ratio/

Как применять коэффициент Debt-to-Equity ratio

reserve asset ratio

Источник: https://zen.yandex.ru/media/id/5c653bc4b911e900ad4c6044/kak-primeniat-koefficient-debttoequity-ratio-5cf7ae3e7e0d5200ae50fd03

15 ways to perform Banking Stock Analysis you should know

reserve asset ratio

The banking business is different from other businesses. So, we need to look at different parameters to perform basic banking stock analysis.

But, the basics will remain same i.e., we will study the quality of the business through its numbers and other non-number parameters.

Banks primary business is to give out loans to different customers and charge interest on the loans.

Banks also have other fee-based business credit card and debit card services, transferring money, insurance, mutual funds, etc.

How to perform banking stock analysis?

In this article, we will focus on the primary business of lending and how to perform banking stock analysis.

In order to provide loans, banks accept deposits and also borrow from other banks, financial institutions and Reserve Bank of India.

So, banks’ major income is in the form of interest income and also major expense is in the form of interest expense.

To evaluate the interest income, we have to look at their financials.

To illustrate how numbers and the ratios are inferred, we have used HDFC Bank’s data as case study.

We have here 15 ways in which we can evaluate a bank stock –

1. Interest Income

Extract of HDFC Bank’s Profit and loss statement showing Interest Earned.

We see that interest earned by HDFC Bank rose at a CAGR of 20% in last 5 years.

We can make a comparative table for comparing the CAGR of peer banks.

Also Read: Fundamental analysis of Stocks

A bank’s major expense is Interest Expense.

2. Net Interest Income

Net Interest Income (NII) is the difference between interest earned from a bank’s lending activities to its customers and the interest paid to account holders. If the spread between interest earned and interest expenses rises, it will help NII to rise and vice versa. This measure will give us a good idea about the principal business of the bank.

Net Interest Income = Interest Earned – Interest Expended

We can see that Net Interest Income grew at a rate of 22% CAGR over 5 years.

3. Net Interest Margin

Net Interest Margin is calculated by dividing Net Interest Income to Interest bearing assets such as loans and advances. It is to be compared over the years to assess the business of the banks.

Also Read : 22 Important Banking Terms you need to know

Net Interest Margin = (Net Interest Income/ Interest bearing Assets)*100
It is expressed in terms of percentage.

For FY: 2017-18
Net Interest Income = 42906.37 crores

Interest-bearing Assets = 10615563.17 crores

Net Interest Margin = (42906.37/10615563.17) * 100 = 4.04%

We can see that Net Interest Margin is at the same level throughout last few years.

4. Cost to Income Ratio

Cost to Income ratio is ratio of operating expenses to operating income (net interest + other income). It helps in assessing the profitability of the banks.

Lower ratio indicates higher profitability. If the ratio is rising over the years, it means costs are rising at a higher rate than income.

We can see that cost-income ratio of HDFC Bank has slightly reduced over the years; it indicates costs have risen at higher rate than income.

5. Net Profit

every business, we must check the net profit and compare it with previous years to understand the trend in profitability of the business.

We can see that PAT increased steadily at a CAGR of 20% for last 5 years.

6. Return on Assets (ROA)

Return on Assets shows how profitable a bank is relative to its total assets. It also indicates how efficiently it is using its assets to generate earnings.

It is calculated by dividing Net Profit by Total Assets.

It is expressed in terms of percentage.

This ratio is used by the shareholders to measure their return on investment. ROE is calculated by dividing Net Profit by Net Worth (Capital + Reserves & Surplus).

Return on Equity decreased from 2014 levels but is constant level for last 3 years.

8. Total Advances

Total Advances is an important metric to look at because the bank’s primary earning comes from this asset. Advances are loans given out to customers and hence it is considered as assets in business and one of the key part of banking stock analysis . The rise in assets and rate of rise will tell us how the bank is growing its business.

We can see the advances grew at a CAGR of 22% over the last 5 years.

9. Total Deposits

Deposits forms major source of funds for the banks. Banks accept deposits in the form of term deposits, savings and current account. Banks lend the deposits it receives. Hence, analyzing deposits numbers will tell us how comfortably the banks are able to acquire funds to lend.

We can see that deposits also grew at a CAGR of 21% over last 5 years.

10. Loans to Deposit Ratio or Credit to Deposits Ratio

Loan to Deposits is used for measuring the bank’s liquidity. An optimum level of liquidity is considered good.

High ratio may indicate possible liquidity crunch and low ratio indicates under-utilization of funds.

CASA ratio of a bank is the ratio of deposits in current and savings account to total deposits. A higher CASA ratio is desired because banks give low rate of interest in savings account (3-4%) deposits and no interest in current account deposits. High CASA ratio indicates lower cost of funds.

It means around 43% of the total deposits are from current and savings account.

12. Gross NPAs

A loan asset becomes non-performing when it ceases to generate any income for the bank. Gross NPAs are the total loans classified by the banks as non-performing. Higher NPAs is adverse for the banks. This should be checked to determine the asset quality of the banks.

Download E-Book: Banking Awareness Book for Beginners

Gross NPA ratio is the ratio of gross non-performing assets to gross advances.

Net NPA is Gross NPA – (Balance in Interest Suspense account DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held).

Net NPA ratio is the ratio of net non-performing assets to net advances.

PCR is the ratio of the total provision balances of the bank to gross NPAs. PCR ratio indicates the extent to which the bank has provided for the weaker part of its loan portfolio. A high ratio suggests that further provisions to be made by the bank in the coming years would be relatively low unless the GNPAs rise at faster rate.

Capital Adequacy Ratio is the ratio of bank’s capital to aggregated risk-weighted assets. It is also known as capital to risk weighted assets ratio (CRAR). It is decided by central banks to prevent commercial banks from taking excess leverage.

The Basel III norms stipulated a capital to risk weighted assets of 8%. However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%.
CAR = (Tier-I capital + Tier-II capital)/ Risk-weighted Assets

Tier-I Capital

Tier-I capital consists of equity capital, statutory reserves+ disclosed free reserves. Tier-I capital is used to absorb losses and does not require a bank to cease operations.

Tier-II Capital

Tier-II capital comprises retained earnings, unaudited reserves, general loss reserves and hybrid debt capital instruments. This capital absorbs losses in the event of a company winding up or liquidating.

Risk-weighted Assets

Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights are assigned by the banking regulator to each such assets.

Key Takeaways for performing banking stock analysis:

PEERS: These ratios should be compared with peer banks and the industry average to decide the position of bank with respect to its competitors and whether one should invest in that particular banking stock or not.

Economic slowdown: Loan business broadly imitates India’s GDP mix by catering to the consumption theme. A slower-than-expected pickup in India’s economic growth or a slowdown in job creation coupled with a sharp rise in interest rates could affect demand for retail loans and margins.

Business Portfolio: We have study the business portfolio of the banks to get a better idea of its business model. The loan mix of corporate and retail loans can be differentiator of performance between two banks. Corporate loans are riskier than retail loans.

Impact of Regulators: Banking industry is highly regulated by the central bank. The regulators decision regarding various aspects maintenance of cash reserve ratio (CRR), statutory liquidity ratio (SLR) and repo rates affect banking business.

Источник: https://www.elearnmarkets.com/blog/banking-stock-analysis/

Investing Strategies That Work!

reserve asset ratio

This is an in-depth guide on how to calculate Asset Coverage Ratio with through interpretation, analysis, and example. You will learn how to use its formula to evaluate a firm's debt repayment capacity.

When you’re considering investment in a company, there are a variety of tools available to you to determine whether it is worthwhile or not.

One of these tools is the Asset Coverage Ratio which is the measurement used to determine a firm's ability to pay off or cover its debt given its assets.

This is an especially important ratio in helping you to understand whether or not the company’s assets can cover any debts owed to you and other investors.

If a company is unable to pay its debts, selling off these assets might be the only solution.

When analyzing the ratio, the broad consensus is the higher the coverage ratio, the better as it reflects the ability of the business to fulfill its debt obligations against its assets.

In using this ratio, analysts tend to take the view that for Utilities companies, the asset coverage ratio should be at least 1.5 whereas industrial companies should have a ratio of at least 2.

Anything below these respectively would signal that the company does not have the ability to pay back all of its debts given its assets.

More…

Formula

The simplest way for you to calculate the ratio is by using the following formula:

Asset Coverage Ratio = ((Assets — Intangible Assets) — (Total Current Liabilities — Short-term Debt)) / Total Debt

This information can be found easily on the company's balance sheet and other financial statements.

  • “Assets” refers to the total company assets
  • “Intangible assets” are assets that are not physical e.g. goodwill.
  • “Short-term Debts” are those that are due within one year.
  • “Total Debt” is all outstanding short and long term debt.

Example

ABC Co is an investment company and has the following on its financial statements:

  • Tangible Assets (Total Assets — Intangible Assets): $2,350m
  • Current Liabilities: $870m
  • Short-Term Debts: $624m
  • Total Debts: $900m

We would substitute this into the equation as follows:

ABC Co’s Asset Coverage ratio is 2.34 which suggests that ABC Co does have the ability to pay off its debts given its assets.

As we are analyzing an investment company, this ratio would have had to have been over 2 to be acceptable to investors.

Another example of a company in a different industry is as follows:

XYZ Co is a Utilities company and has the following on its financial statements.

  • Tangible Assets (Total Assets — Intangible Assets) = $4,100m
  • Current Liabilities = $1,935m
  • Short-Term Debts $76m
  • Total Debts $1,850m

We would substitute this into the equation as follows:

XYZ Co’s Asset Coverage ratio is 1.21 which would suggest to investors that there would be a strong lihood that XYZ would not have the ability to pay off its debts given the assets it has to draw upon.

As we are analyzing a Utilities company, this ratio would have had to have been over 1.5 to be acceptable to investors.

Interpretation & Analysis

When a company’s asset coverage ratio is above its recommended guideline (1.5 or 2 respectively), it suggests that the company has enough assets compared to its total borrowings and thus is more ly down the road to pay off its outstanding debts.

So what is a good asset coverage ratio?

The higher the ratio, the better as this reflects how many times over the company can cover its debt and is thus deemed less risky.

When a company's asset coverage value is below the recommended guideline for its industry, this suggests that it has insufficient assets that it would be able to draw upon in the event it should need to pay its debts back to you.

The closer to the industry guideline the ratio falls, the riskier the company.

Cautions & Further Explanation

One of the major flaws of this ratio is that it is a company’s ‘book value’ which may inflate the ratio and thus portray an overly optimistic reflection of the company and its ability to cover its debts.

To avoid this, analysts can instead value the assets at their actual depreciated value rather than their book value which would provide a much more realistic representation of the company’s asset ability versus its debt.

If you’re using the ‘book value’ then another way to reduce the possibility of skewed results would be to compare the ratio against other asset coverage results from similar companies in the same industry which would give you a better understanding of the reliability of the result.

Overall this ratio would ly be more informative for you when used alongside several other performance and coverage ratios in order to develop an all round, accurate view of a company and its abilities.

Источник: https://wealthyeducation.com/asset-coverage-ratio/

Cash Reserve Ratio | Examples of CRR with Step By Step Calculation

reserve asset ratio

In the parlance of the commercial banking system, the cash reserve ratio denotes the proportion of overall deposits that a bank is required to retain with the central bank of the country. The proportion of bank deposit that has to be maintained with the central bank is also determined by the central bank itself.

In some cases, the amount of reserve is decided the past experience of the central banks in each region during instances of a bank run i.e. when a large number of depositors withdraw their deposits at the same time.

The Federal Reserve is the central bank for the United States, while it is Bank of England for the United Kingdom.

A bank is mandated to maintain the CRR to avert any shortage of funds during instances of bank run. Inherently, the central banks use the CRR as a means to manage liquidity in the economy by controlling the money supply.

For example, the central bank will increase the CRR and shrink bank lending to control money supply in the market in case of a Contractionary Monetary Policy.

On the other hand, the central bank will reduce the CRR and add to the market liquidity in case of an Expansionary Monetary Policy.

Cash Reserve Ratio Formula

The formula for the cash reserve ratio is fairly simple and it can be derived by dividing the cash reserve that the bank is obligated to maintain with the central bank by the overall bank deposits. Mathematically, it is represented as,

Cash Reserve Ratio = Reserve Requirement / Bank Deposits * 100%

Examples of Cash Reserve Ratio (With Excel Template)

Let’s take an example to understand the calculation of the Cash Reserve in a better manner.

CRR – Example #1

Let us take the example of an economy where the central bank has decided on a Contractionary Monetary Policy and as such it has raised the cash reserve ratio from 4.5% to 5.5% in order to reduce money in the market. Now as per the new regime, Calculate the additional reserve required by a bank with overall bank deposits of $200 million.

Solution:

Additional Cash Reserve Requirement is calculated by using the formula given below

Additional Reserve Requirement = (New Cash Reserve Ratio – Old Cash Reserve Ratio) * Bank Deposits

  • Additional Reserve Requirement = (5.5% – 4.5%) * $200 million
  • Additional Reserve Requirement = $2 million

Therefore, in this way the central bank has reduced the money supply to the tune of $2 million in the case of this bank per se.

CRR- Example #2

Let us take the example of bank ASZ Ltd that is located in the US. The bank has net transaction accounts of $150 million and it wants to calculate its cash reserve requirement according to the newly chartered reserve requirement by the Federal Reserve. As per the new rule, net transaction accounts of less than $16.

3 million is exempted from any requirement, net transaction accounts of more than $16.3 million and less than $124.2 million will attract 3% reserve requirement and net transaction accounts of more than $124.2 million will be subjected to a 10% reserve requirement. Calculate the reserve requirement of ASZ Ltd.

for ASZ Ltd can be

Solution:

Cash Reserve Requirement for ASZ Ltd is calculated as:

  • Reserve Requirement   = $16.3 million * 0% + ($124.2 million – $16.3 million) * 3% + ($150 million – $124.2 million) * 10%
  • Reserve Requirement  = $5.82 million

Therefore, ASZ Ltd needs to maintain a cash reserve of $5.82 million with the Federal Reserve according to the new regulations.

CRR – Example #3

Let us now take the latest annual report of Bank of America to understand the concept of cash reserve ratio in the context of real life. According to the annual report of 2018, the overall deposits of the bank stood at $1,381.48billion on the balance sheet. Calculate the cash reserve requirement of Bank of America for the year 2018.

Since the bank has the majority of its liabilities in the US, we will consider the reserve requirement of the Federal Reserve for ease of calculation.

Solution:

Cash Reserve Requirement of Bank of America is calculated as:

  • Reserve Requirement   = $0.016 billion * 0% + ($0.124 billion – $0.016 billion) * 3% + ($1,381.48 billion – $0.124 billion) * 10%
  • Reserve Requirement = $138.14 billion

Therefore, for the year 2018, Bank of America is mandated to maintain a cash reserve of $138.14 billion which fairly close to the highlighted value of $148.34 billion maintained under Assets.

Source: media.corporate-ir.net

Advantages and Disadvantages Cash Reserve Ratio

Advantages and Disadvantages of CRR are as follows:

Advantages of CRR

Some of the advantages of the Cash Reserve Ratio are:

  • The cash reserve ratio is primarily useful in controlling the money supply in the system by fostering a smooth money supply along with credit in the economy
  • The cash reserve ratio helps in developing a sustainable solvency position of the commercial banking system in an economy.

Disadvantages of CRR

Some of the disadvantages of the Cash Reserve Ratio are:

  • When the cash reserve ratio is raised to make banks hold larger deposits in the Federal Reserve, it eventually results in increased cost of borrowing for banks.
  • Frequent changes in the cash reserve ratio can result in an uncertain economic environment for commercial banks.

Conclusion

So, it can be seen that the cash reserve ratio is a mean to manage the liquidity of the commercial banks to maintain sustainable and smooth banking system in an economy.

This has been a guide to the Cash Reserve Ratio. Here we discuss how Cash Reserve Ratio can be calculated with its formula together with examples and a downloadable excel template. You can also go through our other suggested articles to learn more –

Источник: https://www.educba.com/cash-reserve-ratio/

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