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What is Capital Base?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 September 2016
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    Conjecture Corporation
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Capital base is a term used to describe the funds that a company generates as the result of an initial public offering or IPO, as well as any additional offerings that the corporation makes at a later time. Any retained earnings that are generated by the business are often considered part of the capital base. The term can also be used to identify the initial capital used by an investor to secure a given security, or the total of initial capital used to secure all the assets currently contained in the investment portfolio. With either application, the identification of the capital base helps to provide a starting point for evaluating the successful generation of revenue over a period of time.

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With companies that issue public offerings, the idea is to make use of those funds to generate additional revenue. Thus, knowing what type of capital base was created through the use of those offerings is essential when it comes to determining how to grow those proceeds and generate a profit for the activity. By subtracting the capital that is acquired as a result of the IPO from the subsequent earnings generated by those issued shares of stock, the business can easily identify if the IPO did in fact perform up to expectations. If the return is not what was anticipated, the company can investigate the process, determine where it failed to function as projected, and take steps to correct the process for use with subsequent offerings.

In much the same manner, an individual investor is interested in how much of a true return is realized from purchasing or selling any investment. By allowing for the amount of resources used to secure the asset, it becomes a simple task to calculate the current ROI or return on investment. The capital base also makes it possible to determine the ROE, or rate on equity, that is generated by each asset over the period of time that has passed between the point of purchase and the current date. Understanding the rate of return as it relates to individual holdings as well as the cumulative worth of the investment portfolio can help the investor refine his or her investment strategies, since the process makes is much easier to know what assets to keep and what assets should be sold.

Since the process of identifying the capital base is relatively simple, it can easily be used as an effective benchmark in measuring the true rate of return that is generated within a specific period of time. While the capital base remains somewhat consistent over time, it may change due to the buying and selling activity of the individual investor, or additional offerings of stocks that are released by the corporation. Adjusting the capital base to allow for these events is not difficult, and will ensure that the investor always has a reliable base to work with when it comes to assessing his or her return on current investments.

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