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# Gearing Ratio - PEV

Lin84
New MemberRegistered Posts:

**12**
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!

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!

0

## Comments

1If 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.

11I have funny ways of remembering things, but gearing, I think of 'Duke of Edinburgh' (initials)

DebtOverEquityIts worth a go! Good luck :001_smile:

127Equity 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!

52I hope this helps?

12Thank you!!

Lin!

-x-

4Debt (non-current liabilities)Capital Employed (equity+ non-current liabilities)