Gearing Ratio

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A-Vic
A-Vic Registered Posts: 6,970 Beyond epic contributor 🧙‍♂️
Am getting confused with this can someone tell me the Ratio and what it may be used for?

Thanks in advance


Vic

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  • A-Vic
    A-Vic Registered Posts: 6,970 Beyond epic contributor 🧙‍♂️
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    i ment on how to work out the figures?
  • Ampsie
    Ampsie Registered Posts: 145 Dedicated contributor 🦉
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    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
    lisnic Registered Posts: 141 Dedicated contributor 🦉
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    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
    Ampsie Registered Posts: 145 Dedicated contributor 🦉
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    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
    dobbieobby Registered Posts: 231 Dedicated contributor 🦉
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    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
    dobbieobby Registered Posts: 231 Dedicated contributor 🦉
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    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
    lisnic Registered Posts: 141 Dedicated contributor 🦉
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    lol see told you it was off the top of my head - at least it is an actual ratio though!!!
  • A-Vic
    A-Vic Registered Posts: 6,970 Beyond epic contributor 🧙‍♂️
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    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
    dobbieobby Registered Posts: 231 Dedicated contributor 🦉
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    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
    A-Vic Registered Posts: 6,970 Beyond epic contributor 🧙‍♂️
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    Cheers Doobie :)
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