UNIT 7 GEARING RATIO Flashcards
What does grearing look at
Looks at structure of capital within a bs
define gearing ratio
How much of a bs capital employed is made up of non current liabilities
give examples of NCL
loans, mortgages , bonds, debentures
Equation for Gearing Ratio
NCL/CAPITAL EMPLOYED x 100
how do we work out capital employed
Total Equity + NCL
how do we work out tota equity
retained profit + share capital
where do we find components for equation
balance sheet
A higher % Gearing means youre more
leveraged as a bs
the more leveraged you are as a bs the more sensitive you are to
interest rate inreases
as loans , mortgages and debentures have an IR attached what happends when you take out a NCL
Renting moeny
if IR goes up and a bs is hghly geared wahr does this simply mean
costs of bs have gone up
what is important about debt
vital component to expanding abs
its iportnat we expand our bs through share capital but not only share capita why ?
wanna keep SH happy - as they’ll question why bs majorly reliant on share capital
A gearing ratio of 50% or more means
highly gared bs
when is a highly geared bs at risk
and why
if IR increase or
have low/consistent profit
can lead to liquidity issue
what does it mean if you have a geairng ratio of 25% or less
and so you are
low gearing ratio , so safe from liquidity POV
what is an accpetbale gearing ratio
25-50%
where youa re withn the accpetbalegearing ratio range depends on
IR
explain 2009-2020 in terms of IR and gearing
low IR
so bs within thistime period tend to be at a higher level within the range
explain 2021 in terms of intterst rate and acceptable gearing ratio range
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
when is a higer gearig ratio approprtioate
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
when is low gearing ratio mroe approprtiqate
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
HOW TO REDUCE GEARING RATIO IF HIGH pt 1
Reduce NCL through using cash to pay down NCL
when reducing gearing ratio by using cash to pay down NCL what do we need to look at and why
current ratio in that time
as cash lvl reduces and therefore current liabilities
could give you liquid issue
HOW TO REDUCE GEARING RATIO IF HIGH pt 2
Increasing SC as part of total equity
explan reducing gearing through increasing SC
part of TE
therefore part of capital employed so if increase it youre gearing ratio will reduce
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
