gearing ratios Flashcards
what does gearing show
looking at all the capital a business has raised from borrowing, shareholders etc
looks at how much of that amount is from borrowing
where a business gets its capital from
where is the gearing ratio located
located at bottom of statement of finanical position
how do you calculate the gearing ratio
first work out the capital employed
capital employed=non-current liabilities +total equity
then can find out gearing ratio by
non current liabilites divided by capital employed x 100
lowly geared
when gearing ratio is calculated, buisness has borrowed less then a quarter (0-24%) of its capital
moderately geared
when the amount they have borrowed out of their overall capital is between 25-50%
most business want to be moderately geared
highly geared
where more then half of the capital has been funded through borrowing
+50%
dis of highly geared
has taken out a lot of its capital by borrowing
meaning this money needs to be repaid and with interest
become vulnerable to interest rates if interest rates rise, could mean business is paying back significantly more interest a month
bad for liquidity of business
starts to struggle with cash
adv of highly geared
if business is confortbaly pying off loans, then paying loans is easy
might be able to absord increase in interest rates much more easily
qhat may highly geared business do
reduce how highly geared it is
might have to pay back more to make it less highly geared
invite more owners into businesses
