CC Registration and Close Corporation Information

Close Corporation (CC) Ratio and Analysis

Just like sole traders, partnerships and other forms of business ownership, the members or owners that invest money will expect returns on their investments. The ratios that are related to a CC are the return on members equity, debt : equity ratio and the return on total capital employed.

The ratios will be discussed in detail below:

Return Earned By Members

Members invest their money into the CC with the goal of earning a return on their contribution. CC members invest in the CC through member’s contributions, retained income that has been left in the CC and also in the form of loans to the Close Corporation.

The return earned by members in calculated by taking the net profit after tax plus the interest on loans to the CC.

As with other business and investment options, members will compare their earnings from the CC to other investment opportunities.

Debt : Equity Ratio

The debt to equity ratio is used to determine the risk of the business which is the amount invested from outside sources to what the members have invested. Remember that loans from members will be added to the equity.

To determine the position of the business you will need the following guidelines:
  • Ratio of less than 1 = Low risk
  • Ratio of more than 1 = High risk
There is nothing wrong with high risk as long as the return earned is positive,  but always analyze the investment from all angles and get advice before making drastic decisions.

Return on Total Capital Employed

This ratio is used to measure if the capital in the business is working for the business or not. It is important that all businesses aim for positive gearing (a return higher than current interest on the loan in the long term) otherwise the business will run into problems such as cash flow problems, etc.

Summary of Close Corporation (CC) Ratios

1.) Return on Member's Equity:

Net Profit after tax + interest on loans
Average equity + loans from members
X 100

Reason: Measures whether the CC is a viable investment option for members.

2.) Debt : Equity Ratio

External loans : Members Equity + Loans from members

Reason: Measures the risk of the CC

3.) Return on Total Capital Employed

Net profit after tax+ Interest on Loan (ext) + Interest on loans (members)
Average Equity + Loans (ext) + Loans from members
X 100

Reason: Measures whether loaning money is a viable financial decision.

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