Gearing Flashcards

1
Q

What is gearing

A

How much debt a business has

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2
Q

Equation for gearing

A

Non current liabilities / total equity + NCL X 100

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3
Q

What is considered highly geared

A

• over 50%
= interest rates have to be payed
= high geared & low liquidity = risky

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4
Q

What is considered low gearing

A

Lower than 25%

- lack of ambition = risk adverse

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5
Q

Two benefits for low gearing

A
  • business is financed by shareholders = optional dividend payments
  • no risk of increasing interest rates
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6
Q

Benefits of high gearing

A
  • ## business may have few shareholders = can regain decision making power
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7
Q

Two ways to improve increasing gearing

A
  • focus on growth ( ^ revenue, R&D, advertising)

- borrow money to cover short term debts

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8
Q

Two ways to improve reducing gearing

A
  • Repay loans

- issue more ordinary shares

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