Key Takeaways
The working capital ratio is a general measure of a company's liquidity. It's calculated by dividing its current assets by its current liabilities. A good working capital ratio typically falls between 1.5 and 2.0. Ratios of less than one potentially indicate future liquidity troubles.
The ratio should take values above 1 (it means that own financing prevails over foreign financing, i.e. debt). Low ratio levels (below 1) are interpreted as substantial debt of the company and low creditworthiness (high ratio levels in turn are interpreted as low debt and high creditworthiness and debt capacity).
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%.
Investors usually look for a company to have a debt ratio between 0.3 (30%) and 0.6 (60%).
According to HubSpot, a good debt-to-equity ratio sits somewhere between 1 and 1.5, indicating that a company has a pretty even mix of debt and equity. A debt to total capital ratio above 0.6 usually means that a business has significantly more debt than equity.
For lenders and investors, a high ratio (typically above 2) typically means a riskier investment because the business might not be able to make enough money to repay its debts. If a debt ratio is lower - closer to zero - this often means the business hasn't relied on borrowing to finance operations.
Core capital is the minimum amount of capital that thrift banks must maintain to comply with Federal Home Loan Bank regulations. In combination with risk-weighted assets, core capital is used to determine Common Equity Tier1 (CET1) ratios that regulators rely on to define a bank's capital requirements.
Your benchmark for capital efficiency depends on your industry. While a 1:1 capital efficiency ratio is good, the ideal is 3:1. Capital efficiency optimization requires looking at the full picture of your company's financial health.
For both the quick ratio and the current ratio, a ratio of 1.0 or greater is generally acceptable, but this can vary depending on your industry.
Financial regulators adopted stricter rules to make sure that banks meet capital requirements. One of these is maintaining a tier 1 capital ratio of 6%. This ratio is determined by dividing a bank's tier 1 capital by the total risk-weighted assets. A bank is considered capitalized if it meets this threshold.
Tier 1 common capital ratio is a measurement of a bank's core equity capital, compared with its total risk-weighted assets, and signifies a bank's financial strength.
A CAR of 38% is a high capital adequacy ratio. That means that Acme Bank should be able to weather a financial downturn and losses associated with its loans. It is less likely than banks with less than minimum CARs to become insolvent.
Companies should therefore borrow as much as possible. Optimal capital structure is 99.99% debt finance.
As just noted, a working capital ratio of less than 1.0 is an indicator of liquidity problems, while a ratio higher than 2.0 indicates good liquidity. A low ratio can be triggered by difficult competitive conditions, poor management, or excessive bad debts.
What is the Current Ratio? The current ratio, also known as the working capital ratio, measures the capability of a business to meet its short-term obligations that are due within a year. The ratio considers the weight of total current assets versus total current liabilities.
A good working capital ratio (remember, there is no difference between current ratio and working capital ratio) is considered to be between 1.5 and 2, and suggests a company is on solid ground.
An efficiency ratio of 50% or under is considered optimal. If the efficiency ratio increases, it means a bank's expenses are increasing or its revenues are decreasing.
The optimal capital structure is commonly measured using the debt to equity ratio (or D/E ratio). The debt to equity ratio (D/E) is a credit metric that measures the financial risk of a company by comparing its total debt to the value of its shareholders' equity as prepared for bookkeeping purposes.
Given that 1/1.618 = 0.618 and 1–0.618 = 0.382, it can be stated that the capital structure follows the golden ratio if the two components of capital represent proportions of 61.8% and 38.2%, respectively.
They find that the ratio of tier 1 capital to risk-weighted assets should fall within a range of 16 to 20 percent, which has a midpoint of 18 percent. The average risk-based tier 1 capital ratio for U.S. banks is 14.1 percent and 14.5 percent for large banks.
The capital ratio is calculated using the definition of regulatory capital and risk-weighted assets. The total capital ratio must be no lower than 8%.
The optimal debt-to-equity ratio will tend to vary widely by industry, but the general consensus is that it should not be above a level of 2.0.
High debt ratio: If the result is a big number (like 0.7 or 70%), it means the company owes a lot compared to what it owns. This could be risky.
What should the book to market factor be? Generally, the results of your book to market ratio should be around 1. Less than 1 implies that a company can be bought for less than the value of its assets. A higher figure of around 3 would suggest that investing in a company will be expensive.