Gearing Ratio

A-Vic

Am getting confused with this can someone tell me the Ratio and what it may be used for?

Thanks in advance


Vic

A-Vic

i ment on how to work out the figures?

Ampsie

Hi A-Vic,

There are two ways to calculate gearing, either are acceptable to use in an exam.

They are:

debt/ debt + equity or debt/ equity.

It shows what percentage of the company is financed by debt.

Hope that helps

Ampsie
:-)

lisnic

if i remember rightly (i havent revised ratios yet) the gearing ratios are the ratios regarding businesses ability to pay interest on debts etc as payable

it indicates the number of times the interest on debts can be paid from profits

profits before taxes/ interest payable

will then give you a ratio

this ratio will indicate to creditors if interest that will fall on any loans/etc can be paid as it falls due

someone correct me if im way off as i say i havent revised ratios yet!!

Ampsie

Hi Lisnic,

i think you are thinking of the interest cover ratio which shows how many times the profit from operations can cover the interest obligations of the company.

I did DFS in June and was saying ratios in my sleep!!!!

Ampsie
:-)

dobbieobby

I remember it as:
Bank loan / bank loan + total equity.
If the figure increases from the previous year the accounts have deterioated.
I think it's easier to learn it this way as you remember to look at the bank loan bit on the balance sheet and can see why.

dobbieobby

I DID remember the interest ratio as:
Doctor Interest.
Because a Doctor is a GP, GP is Gross Profit.
Course it's all changed now and it's:
Profit from operations / Interest.
So I just remember that it's the line above interest / interest.

It shows how many times the company can pay back the interest.

4 and over is good as a standand.

Tad DARRRRRR. My work here is done. I'm going home :-) x

lisnic

lol see told you it was off the top of my head - at least it is an actual ratio though!!!

A-Vic

Thanks peeps it was the share holders bit that was confusing me

Ok but total equity? is it all the share capital retained earnings and revaluation?

dobbieobby

Yes it is A_VIC, have a look at all the past exams you can, they ALWAYS say what the Total Equity is (which is also always the bottom figure on the balance sheet...)
Just wish I could get personal tax, then I'd be soooo much happier!!!

A-Vic

Cheers Doobie