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# How to Calculate the Primary Capital Asset Ratio for a Bank

Original post by Bryan Keythman of Demand Media

A primary capital ratio measures a bank's risk.

A bank’s primary capital ratio measures its primary capital as a percentage of total assets. Primary capital consists of money from sources such as common stock and preferred stock. Unlike other sources of money that a bank must pay back, such as money from customer deposits, primary capital is considered more permanent. A higher primary capital ratio means a bank has a greater financial cushion in case its business suffers losses. You can calculate a bank’s primary capital ratio using information from its annual report.

## Contents

### Step 1

Find a bank’s balance sheet in its 10-K annual report. You can obtain this report from the investor relations section of the bank’s website or from the U.S. Securities and Exchange Commission’s EDGAR online database.

### Step 2

Identify the amounts of total stockholders’ equity, total assets and loan-loss reserves on the balance sheet. The amount of loan-loss reserves is money a bank sets aside in case some of its loan borrowers cannot repay. For example, assume a bank has \$100,000 in total stockholders’ equity, \$1.5 million in total assets and \$10,000 in loan loss reserves.

### Step 3

Add together total stockholders’ equity and loan-loss reserves to calculate primary capital. In this example, add \$100,000 in total stockholders’ equity and \$10,000 in loan-loss reserves to get \$110,000 in primary capital.

### Step 4

Divide primary capital by total assets. Multiply your result by 100 to calculate the primary capital ratio. In this example, divide \$110,000 by \$1.5 million to get 0.07. Multiply 0.07 by 100 to get a 7 percent primary capital ratio.

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### Tips & Warnings

• Compare a bank’s primary capital ratio with those of its competitors to compare its risk level with its peers.