Options
Registered Posts: 711 Epic contributor 🐘
How do you calculate Gearing Ratio and Interest Cover?

• Registered Posts: 107 Dedicated contributor 🦉
Options
gearing ratio:
long term loans/ capital employed (total assets- current liabilities)

interest cover:

profilt from operations/interest

hope this helps

emma :-)
• Registered Posts: 6,970 Beyond epic contributor 🧙‍♂️
Options
what would be the outsome of these anyone please?
• Registered Posts: 52 Regular contributor ⭐
Options
Hi, do you mean what do the ratios tell you? The gearing percentage shows how much of the company is financed by debt and the interest cover shows how many times the company can cover finance costs from operating profit. The higher the interest cover ratio the better. The higher the gearing percentage, the more the company is relying on long term borrowings.

Hope this helps...
• Registered Posts: 711 Epic contributor 🐘
Options
Thanks very much Ema and Koda
• Registered Posts: 6,970 Beyond epic contributor 🧙‍♂️
Options
Thanks koda just what i was looking for
• Registered Posts: 29 Regular contributor ⭐
Options
Gearing Ratio

Hello
There are two way to calculate gearing ratio, the standard formula for Gearing is :

Gearing = Loans/loans + equity capital

Second formula:-

Long term borrowing/net assets

IMPORTANT

If the gearing figure is more than 60%, it is generally reported high; 100% is very high.

Less than 20% could be taken as low. but in all cases it depends upon the prevailing circumstances at the time and what point of comparison is.

Best regards

Khurram Taj
• Registered Posts: 13 New contributor 🐸
Options
gearing ratio

Hi, i've been looking at june 08 paper and the gearing ratio has two answers;

long term long £12000/net assets £8400 = 1.42
or
long term loans £12000/Long term loan £12000 + net assets £8400 = 58.82%

I can understand the 58.82% answer as an indicator, but I don't understand what 1.42 is meant to mean?

Could anyone help?
• Registered Posts: 585 Epic contributor 🐘
Options
gearing ratio can be calculated in 2 ways

1 divide debt by equity(=net assets) times 100

in your post the 1.42 is a ratio of debt to equity. this tells us that debt is 142% of equity which is almost 3 times more then generally prefered 50% by the lenders and investors.

The % on this calculation will be higher then the following calculation.

or

2 divide debt by (equity plus debt) times 100

IN this calculation the debt is a percentage of the Capital Employed- (eqity plus debt)
Generally this is the prefered gearing ratio by the examiners.

as per your post the ratio is 59% which is much higher then 33% generally prefered by the lenders and investors.

33% of capital employed (3 parts) is equal to 50% of equity (2 parts)

hope this helps
• Registered Posts: 231 Dedicated contributor 🦉
Options
koda wrote: »
Hi, do you mean what do the ratios tell you? The gearing percentage shows how much of the company is financed by debt and the interest cover shows how many times the company can cover finance costs from operating profit. The higher the interest cover ratio the better. The higher the gearing percentage, the more the company is relying on long term borrowings.

Hope this helps...

What a fantastic answer!! Thank you :-)
• Registered Posts: 1,281 Beyond epic contributor 🧙‍♂️
Options
koda wrote: »
Hi, do you mean what do the ratios tell you? The gearing percentage shows how much of the company is financed by debt and the interest cover shows how many times the company can cover finance costs from operating profit. The higher the interest cover ratio the better. The higher the gearing percentage, the more the company is relying on long term borrowings.

Hope this helps...

so thats all we need to write down in the exam when commenting on the ratios? Also if they have increased/decreased and if thats good or bad?
• Registered Posts: 231 Dedicated contributor 🦉
Options
I think it is, I didnt really get what gearing exactly was, but now I do!
Why dont the books put things in plain English like people do on here???!!!!!