Topic Four, Part 16 - Gearing Ratio Flashcards
What is gearing ratio?
Measures the proportion of a company’s borrowed funds to its equity.
What does a high gear mean?
high proportion of long-term borrowing to equity (over 50%)
What does a low gear mean?
Low proportion of debt to equity (less than 50%)
What is gearing?
How much of the businesses long-term finance is from loans
what are some issues if proportion of borrowing is high?
- high Interest on loans
- risk losing assets
- less likely to be able to borrow
What are the formulas for gearing ratio?
non-current liabilities / capital employed x 100
non-current liabilities / Shareholders’ funds (equity)
What is equity?
Money made from investments
What is the formula for Debt to equity ratio?
debt / equity x 100
What is interest cover?
Number of times a business can pays its interests charges with its operating profit
What is the formula for interest cover?
operating profit / interest payable
What are the benefits of being highly geared?
- May be cheaper than shares
- May mean there is less less shareholders
What are the benefits of being low gearing?
- Fewer costs to pay
- Banks more likely to lend
