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

Its ok. Have just found an answer from Sandy.0

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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