To
calculate CAR, banks are required to calculate their Risk Weighted Assets (RWA)
in respect of credit, market, and operational risks. Total RWA will be
determined by multiplying capital charge for market risk and operational risk
by the reciprocal of the minimum CAR and adding the resulting figures to the
sum of risk weighted assets for credit risk. The CAR is calculated in the
following ways:-
CAR
(Tier 1 Capital Tier 2 Capital)/Risk-Weighted Assets
The Bank separates
capital into Tier 1 and Tier 2 based on the function and quality of the capital.
Such as: -
·
Tier 1 capital is the primary way to
measure a bank's financial health. It includes shareholder's equity and
retained earnings, which are disclosed on financial statements. As it is the
core capital held in reserves, Tier 1 capital is capable of absorbing losses
without impacting business operations.
·
On the other hand, Tier 2 capital
includes revalued reserves, undisclosed reserves, and hybrid securities. Since
this type of capital has lower quality, is less liquid, and is more difficult
to measure, it is known as supplementary capital.
The
bottom half of the equation is risk-weighted assets. Risk-weighted assets are
the sum of a bank's assets, weighted by risk Banks usually have different
classes of assets, such as cash, debentures, and bonds, and each class of asset
is associated with a different level of risk.
Safe
asset classes, such as government debt, have a risk weighting close to 0%.
Other assets backed by little or no collateral, such as a debenture, have a
higher risk weighting. This is because there is a higher likelihood the bank may
not be able to collect the loan. Different risk weighting can also be applied
to the same asset class.
For
example, if a bank has lent money to three different companies, the loans can
have different risk weighting based on the ability of each company to pay back
its loan.
ROA
is calculated by dividing a firm's net income by the average of its total
assets. It is then expressed as a percentage. Net profit can be found at the
bottom of a company's income statement and assets are found on its balance sheet.
ROA can be used by management, analysts, and investors to determine whether a
company uses its assets efficiently to generate a profit.
ROA
is calculated by dividing a company's net income by its total assets. As a
formula, it's expressed as:
ROA
= Average Total Assets/Net Income
(ROA)
helps investors measure how management is using its assets or resources to
generate more income. It's important to compare companies of similar size and
industry.
Earnings
per share (EPS), also called net income per share, is a market prospect ratio
that measures the amount of net income earned per share of stock outstanding.
In other words, this is the amount of money each share of stock would receive
if all of the profits were distributed to the outstanding shares at the end of
the year.
Earnings
per share or basic earnings per share is calculated by subtracting preferred
dividends from net income and dividing by the weighted average common shares
outstanding. The earnings per share formula looks like this.
Earnings
per Share= (Net Income- Preferred Dividends )/ End-of-Period Common Shares
Outstanding
Earnings
per share is the same as any profitability or market prospect ratio. Higher
earnings per share is always better than a lower ratio because this means the
company is more profitable and the company has more profits to distribute to
its shareholders.
Although
many investors don't pay much attention to the EPS, a higher earnings per share
ratio often makes the stock price of a company rise. Since so many things can
manipulate this ratio, investors tend to look at it but don't let it
influence their decisions