Gearing ratios Flashcards
1
Q
What do gearing ratios measure?
A
The company’s capital structure, risk, and reliance on debt financing
2
Q
What is the gearing ratio formula?
A
non-current liabilities / capital employed x 100
3
Q
What is another word for gearing?
A
Leverage
4
Q
What does a high gearing ratio indicate?
A
Greater reliance on debt financing
5
Q
For simplicity, what can represent debt in gearing calculations?
A
Non-current liabilities
6
Q
What is an alternative formula for gearing?
A
total liabilities / equity x 100
7
Q
What is the advantage of debt financing?
A
It’s cheaper than equity financing
8
Q
Why is debt financing cheaper than equity financing?
A
- As residual claimants, shareholders demand a higher return
- Tax shield effect (interest expenses are tax deductable)
9
Q
What is the drawback of debt financing?
A
It’s inflexible (fixed payments regardless of profitability)
