gearing ratios

mickle

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.

mickle

Its ok. Have just found an answer from Sandy.

lhemmings

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?

mickle

Thanks, I think i'll use that way too. In the exam answers there are 3 different answers. How can that be?

Confusing!

lhemmings

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!

Khurram Taj

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 Taj

ema192

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

emma