Formula
Reserve ratio = (retained earnings + capital surplus) ÷ paid-in capital × 100 (%)
With surplus of KRW 500 billion and paid-in capital of KRW 50 billion, the reserve ratio is 1,000%.
Definition
The reserve ratio is the surplus a company has accumulated (retained earnings and capital surplus) divided by paid-in capital, showing as a percentage how much the company has built up internally compared with the capital originally put in. A reserve ratio of 1,000% means the company has accumulated surplus equal to ten times its paid-in capital.
A high reserve ratio is commonly read as the sign of a company that has earned profits for a long time and stored them up. It means the company has resources for investment and dividends without leaning on debt, so it serves as a yardstick for how well stocked its reserves are.
Jupick does not put the reserve ratio directly into the grade, but treats it as a companion for interpreting stability metrics such as the debt ratio and current ratio. Because the reserve ratio produces very large numbers, it is better read by its position within the same sector than by its absolute value.
How to read it
A higher reserve ratio means more surplus accumulated inside the company. Because the reserve ratio grows easily when the denominator, paid-in capital, is small, companies with a low par value or few capital increases can show unusually high reserve ratios.
The reserve ratio does not say what form of assets the accumulated surplus actually takes. It may remain as cash or may already be tied up in equipment, so well-stocked reserves are not the same as plenty of cash available right now.
A high reserve ratio is not always good. Piling up surplus without suitable places to invest can draw criticism for stinginess in shareholder returns. Reading it with the payout ratio gives a sense of whether the company is accumulating profit or distributing it.
Points to watch
- The reserve ratio grows easily when the denominator, paid-in capital, is small. When share capital changes through stock splits or bonus issues, the reserve ratio changes sharply too, so absolute values are hard to compare across companies as is.
- The reserve ratio alone cannot tell whether accumulated surplus is cash or already tied up in assets. Cash and equivalents need to be checked separately.
- A high reserve ratio is not necessarily good, and it is sometimes read as a sign of stinginess in shareholder returns. It needs to be read with the payout ratio.