Gearing Ratio

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Hi Could somebody please explain the gearing ratio.
Sandy Hood said it might be on the PEV(On one of his revision course)I remember doing it at college but carn't remember how to do it. Please help :? regards Heather

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Re:Gearing Ratio

Hi
I honestly cannot say for sure I remember this correctly, but I think I remember something like

Long term debt / Long term debt + equity

But double check

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Re:Gearing Ratio

Hi Heather.

Gearing ratio is debt divided by equity.

The ratio shows how much a company is financed by debt - shouldn't be more than 70% ideally.

Scott.

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Re:Gearing Ratio

Debt divided by equity is often cited as gearing (and I am sure you can quote authors where they use it)

If gearing appears in the PEV exam, I recommend that you use debt divided by debt + equity.

This is the examiner's preference

If you can't find a figure for equity because the question essentially provides a statement of assets and liabilities rather than a balance sheet, then (as you no doubt know already)
the NBV of fixed assests plus the net current assets would give you exactly the same figure as debt + equity.

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Re:Gearing Ratio

When you say debt, do you mean loans? Or debtors? Sorry if that's a stupid questions :oops:

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Re:Gearing Ratio

A good question

I mean long-term loans.

I do not include trade creditors which appear as part of the net current assets.

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Re:Gearing Ratio

The formula is correct

Debt divided by debt + equity

Debt will be anything along the lines of borrowing money to finance buying and production therefore loans and as such but not debtors

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Re:Gearing Ratio

thanks for all your help and good luck to everybody who is sitting the PEV on Monday morning, wouldn't be long and I can have my life back!!!!
regards Heather