Gearing Ratio

sarahwilson

I'm just getting into DFS, well been kicked in at the deep end by Steve ;-).

I've got a couple of questions about gearing ratios, do you include all borrowings for example, HP on cars and machinery? Is there anything that you have borrowed that you wouldn't include apart from a fiver from the man next door for a sandwich?

Also whats an ideal gearing ratio or doesn't that exist? Is there a ratio where you would be warning of impending brown stuff heading towards the fan or does the gearing ratio need to be looked at in context with other ratios like liquidity?

Thanking you

lorrydee

Hi Sarah

You would only include any borrowings which are listed under the LONG TERM BORROWINGS header of your balance Sheet, such as Bank Loans.

LONG TERM BORROWINGS means anything that falls due after one year. Anything that is due to be paid within the next year will be your current liabilities and therefore are not included (stock, creditors, bank overdraft)


At our college, we were taught that anything up to 49% was ok. Once your gearing ratio meets 50% or above then you should start getting worried as it means that more assets are being paid for by long-term borrowings, therefore meaning that there is less available equity in the company.

sarahwilson

Thats great thank you very much