# PEV gearing ratio and interest cover

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Registered Posts: 13 New contributor 🐸
Hi. Could anyone please explain to me how you work out the gearing ratio and the interest cover? I've been looking at the June 08 past paper, but I can't work out how you get the answers for these two ratios.

Also, once you've worked them out, what do they answers indicate towards?

any advice would be greatly appreciated.

• Registered Posts: 116 Dedicated contributor 🦉
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There were a couple of good posts about this the other day on these threads linked below, hope that helps, it definitely helped me:) I don't know if its something you cover in DFS first but as I started with PCR/PEV I didn't have a clue about them and they were in my txtbook, luckily there are people around who know these things!

• Registered Posts: 585 Epic contributor 🐘
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• Registered Posts: 13 New contributor 🐸
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thank you!!

I'm slowly getting there.
• Registered Posts: 17 New contributor 🐸
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June 2008

For the June 2008 paper, this is how the two ratios work

Gearing:-

For Scenario 1
Long term liabilities divided by Long term liabilities+net assets x100 = 12000/(12000+8400) x100 = 58.8 %
OR
Long Term Borrowing divided by Net assets = 12000/8400 = 1.43

For Scenario 2
11300/(11300+8400)x100= 57.36%

OR
11300/8400 = 1.34

Interest Cover:-

For Scenario 1
Operating profit divided by Interest payable = 2750/600 = 4.58

For Scenario 2
2250/600=3.75
• Registered Posts: 29 Regular contributor ⭐
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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.

Intrest Cover

Operating profit/interst payable

It showes that how many time operating profit before the tax can cover the interst payable

Best regards

Khurram Taj