Gearing Ratio - PEV

Lin84

Hiya!

I'm doing the PEV exam on monday :crying:

Can anyone please explain the Gearing Ration to me, I understand that long term liablilties is divided by something x 100% but I don't know what that something is. I'm a bit confused whether it is just fixed assets or net assets?

Good luck to everyone taking exams next week!!

Lin!

wisewood

Gearing Ratio = Long Term Liabilities / Equity

If you want this expressed as a percentage, multiply by 100, obviously.

There are two different gearing ratio calculations though, which do both give different results, however i am told that either would be accepted on the exams.

I think the two variations are;

Debt / Equity

or

Debt / (Debt + Equity)

My tutor prefers the latter.

Elena

Hi Lin,

I have funny ways of remembering things, but gearing, I think of 'Duke of Edinburgh' (initials)

Debt
Over
Equity

Its worth a go! Good luck :001_smile:

Lin84

Thank you both very much. What do you class as equity though from the balance sheet?

Kirstie

Gearing ratio

Equity is the bottom half of the balance sheet (i.e. share capital & reserves)and is the residual amount after deducting all the entities liabilities from all its assets. It therefore balances with the net assets.

In case you have to explain it, the ratio shows the proportion of debt to total finance (equity + debt); the higher the ratio, the riskier the entity is deemed to be (as interest has to be paid before distributions to owners).

N.B. Notes / forum postings for unit 11 (DFS) might help if this isn't clear - it's full of ratios.

Good luck for Monday!

acky2106

The Gearing Ratio is used to show what proportion of a company's Net Assets is made by Long term borrowing therefore, you can simply state this by using the Debt/Equity division i.e the June PCR paper there is a Long term loan of 754/971( Net Assets)x100 = 77.65:1 or rounded up 78:1, this means that 77.65% or 77.65 parts of the Net Assets is effectively paid for by the loan. The other way of expressing this is to divide your long term loan 754 by the long term loan+ Equity(Assets), so 754 divided by (754+971) 1725x100 which reads @ 43.7% of the total is catered for by the loan.

I hope this helps?

Lin84

Thank you all! this now makes sense! I just hope it comes up in the exam now!

Thank you!!

Lin!
-x-

humairakhatri@hotmail.com

Gearing retio is:
Debt (non-current liabilities)
Capital Employed (equity+ non-current liabilities)