PEV gearing ratio and interest cover

chocolate Box
chocolate Box Registered Posts: 13 New contributor 🐸
in AAT Level 4 (Level 8 in Scotland)
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.

Comments

  • donnaalwill
    donnaalwill Registered Posts: 116 Dedicated contributor 🦉
    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!

    http://forums.aat.org.uk/showthread.php?t=24925

    http://forums.aat.org.uk/showthread.php?t=24890
  • sdv
    sdv Registered Posts: 585 Epic contributor 🐘
    this may help

    http://forums.aat.org.uk/showthread.php?t=24766
  • chocolate Box
    chocolate Box Registered Posts: 13 New contributor 🐸
    thank you!!

    I'm slowly getting there.
  • msami4
    msami4 Registered Posts: 17 New contributor 🐸
    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
  • Khurram Taj
    Khurram Taj Registered Posts: 29 Regular contributor ⭐
    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

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