What Is Capital Base?
Capital base, also known as cost basis or bank capital, is generally used to refer to some type of base level of funding. The concept of capital base has multiple applications in finance and often refers to a specific amount of money. Individual investors can use the term to refer to the starting amount of money they invest in a stock or portfolio of stocks.
Banks and publicly traded companies also use the term, but in ways that differ from how the individual investor uses it. What all usages of the term have in common is that they refer to a starting point of funding necessary to measure profit and loss or to meet a regulatory balance requirement.
- Capital base is a term used by individual investors, publicly traded companies, and banks to refer to a base level of funding.
- For individual investors, capital base refers to money used to purchase an initial investment and subsequent purchases of that investment.
- For banks, capital base is synonymous with bank capital and represents the value that results when a bank's liabilities are subtracted from its assets.
- For publicly traded companies, capital base is the capital acquired during an initial public offering (IPO), or the additional offerings of a company, plus any retained earnings (RE).
Understanding Capital Base
When referring to money an investor uses to purchase securities, capital base refers to an initial investment plus subsequent investments made by an investor into their portfolio. The term is essentially synonymous with cost basis.
In order to determine if their investing efforts have been profitable, investors need to know what their investment's capital base is to calculate their return on investment (ROI). The ROI is a simple calculation the investor can use to quickly determine if their investment is net positive or net negative.
When dealing with a bank, capital base can be used synonymously with the term bank capital. Bank capital is the value that results when a bank's liabilities are subtracted from its assets. There are regulatory requirements regarding how much bank capital a bank must maintain.
The Basel Committee on Banking Supervision (BCBS) is an international committee consisting of 45 member nations that develops standards for banking regulation and capital requirements. These requirements specify how much readily available capital banks and other depository institutions must hold, a requirement that was strengthened after the global financial crisis of 2008.
Publicly Traded Companies
For the purposes of a company going public or a company that is already publicly traded, capital base can refer to the capital acquired during an initial public offering (IPO), or the additional offerings of a company, plus any retained earnings (RE).
This is essentially the money contributed by the shareholders who purchased shares in the company's offering plus the amount of net income left over for the company after paying dividends to its shareholders. Since the company's goal is to raise money that will enable it to grow and expand, the company must use the capital base wisely in order to reap the benefits of its IPO.
The Bottom Line
Capital base is important because it provides a benchmark when measuring returns. Without it, investors and companies would be unaware of how their investments have performed because they would have no starting point to use in their measurements.
A bank will keep an eye on its capital base, or bank capital, since it is a regulatory requirement to maintain certain levels of funding. When a bank starts to become inadequately funded, it can raise capital by selling bonds or taking other steps to reduce its liabilities or increase its assets.