gearing ratios
mickle
Registered Posts: 36 Regular contributor ⭐
Having reread my kaplan book this weekend and practiced past papers, it appears we need to know how to calculate a gearing ratio, yet is it is only mentioned in my book and does not go into any detail. I haven't a clue how to calculate it as it appears there a a few variations.
Can anyone help?
Thanks.
Can anyone help?
Thanks.
0
Comments
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Its ok. Have just found an answer from Sandy.0
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Hey there,
I always work it out as:
long term liabilities/capital employed x 100
(capital employed being your net assests + long term loans)
Hope this helps?0 -
Thanks, I think i'll use that way too. In the exam answers there are 3 different answers. How can that be?
Confusing!0 -
I am not entirely sure where they can get 3 diff answers but I know another way of working it out:
Debt/Equity: long term liabilities/share capitals & reserves
But this way confuses me a little too much so I just stick with the previous one as it makes more sense to me and sticks in my head!0 -
Gearing Ratio
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 Taj0 -
The way i have learnt it is
long term loans/ capital employed (total assets- current liabilities) x 100
anything over 50 % is considered highly geared and would be considered high risk.
hope this helps
emma0
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