UNIT 7 GEARING RATIO Flashcards

1
Q

What does grearing look at

A

Looks at structure of capital within a bs

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2
Q

define gearing ratio

A

How much of a bs capital employed is made up of non current liabilities

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3
Q

give examples of NCL

A

loans, mortgages , bonds, debentures

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4
Q

Equation for Gearing Ratio

A

NCL/CAPITAL EMPLOYED x 100

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5
Q

how do we work out capital employed

A

Total Equity + NCL

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6
Q

how do we work out tota equity

A

retained profit + share capital

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7
Q

where do we find components for equation

A

balance sheet

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8
Q

A higher % Gearing means youre more

A

leveraged as a bs

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9
Q

the more leveraged you are as a bs the more sensitive you are to

A

interest rate inreases

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10
Q

as loans , mortgages and debentures have an IR attached what happends when you take out a NCL

A

Renting moeny

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11
Q

if IR goes up and a bs is hghly geared wahr does this simply mean

A

costs of bs have gone up

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12
Q

what is important about debt

A

vital component to expanding abs

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13
Q

its iportnat we expand our bs through share capital but not only share capita why ?

A

wanna keep SH happy - as they’ll question why bs majorly reliant on share capital

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14
Q

A gearing ratio of 50% or more means

A

highly gared bs

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15
Q

when is a highly geared bs at risk

and why

A

if IR increase or

have low/consistent profit

can lead to liquidity issue

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16
Q

what does it mean if you have a geairng ratio of 25% or less

and so you are

A

low gearing ratio , so safe from liquidity POV

17
Q

what is an accpetbale gearing ratio

18
Q

where youa re withn the accpetbalegearing ratio range depends on

19
Q

explain 2009-2020 in terms of IR and gearing

A

low IR

so bs within thistime period tend to be at a higher level within the range

20
Q

explain 2021 in terms of intterst rate and acceptable gearing ratio range

A

IR started to increase

so makes sense for bs to be at lower lvl within acceptable gearing rang

e .g from high 40s to 30s

21
Q

when is a higer gearig ratio approprtioate

A

Low IR

Consistent high profits - to hae some retained profit to fall back on if IR increase

wanna keep control bs and avoid using shares as a method of expansion

22
Q

when is low gearing ratio mroe approprtiqate

A

in high IR enviro as makes you more secure form liquidity pov

Low inconsistent profits - got no retianed profits to fallback on if IR increase

If happy to expand sh base ad have few concerns about losing control and DM

23
Q

HOW TO REDUCE GEARING RATIO IF HIGH pt 1

A

Reduce NCL through using cash to pay down NCL

24
Q

when reducing gearing ratio by using cash to pay down NCL what do we need to look at and why

A

current ratio in that time

as cash lvl reduces and therefore current liabilities
could give you liquid issue

25
HOW TO REDUCE GEARING RATIO IF HIGH pt 2
Increasing SC as part of total equity
26
explan reducing gearing through increasing SC
part of TE therefore part of capital employed so if increase it youre gearing ratio will reduce
27
What do we need to consider when reducing gearing thorug Share capital
may mean giving up control through taking up more SH through Share capita