# gearing ratios

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.

• Registered Posts: 36 Regular contributor ⭐
Its ok. Have just found an answer from Sandy.
• Registered Posts: 7 New contributor 🐸
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?
• Registered Posts: 36 Regular contributor ⭐
Thanks, I think i'll use that way too. In the exam answers there are 3 different answers. How can that be?

Confusing!
• Registered Posts: 7 New contributor 🐸
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!
• Registered Posts: 29 Regular contributor ⭐
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
• Registered Posts: 107 Dedicated contributor 🦉
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