Gearing

mrspnut

Please can someone explain the equation for gearing to me in words of one syllable because every book or website I consult has a different answer and I can't seem to understand any of them.

I've just done the June 08 PEV paper and I cannot get the answers they have at all for the gearing question.

I think my head might explode between now and the 14th.

Rinske

Long-term liabilities divided by capital employed times 100

or

Long-term liabilities divided by equity times 100

Basically there are many ways to calculate gearing, which means there are different formulas to remember, but usually either is right, as long as you use them consistent, so you can compare like with like.

Sorry, more then one syllable words, but you compare how much of the funding of the company has been done by long term debts.

In the question they used either
"Long term borrowing / share capital + profit and loss account + long term borrowing x 100"
or
"Long term borrowing / share capital + profit and loss account x 100"
as alternative answer

Does this help?

mrspnut

Thank you, I wasn't including the P&L account because for some strange reason I though that it was just share capital and long term borrowing that was involved.

Brilliant, it makes sense now.

welshwizard

I agree with what Rinske says but beware!

In a recent skills test for Cash Management, students were asked to calculate Gearing ratio. Nothing unusual there one would think BUT in the question under current liabilities there was a £15,000 loan which, to my way of thinking should not have been included in the Gearing. The model answer, however, disagreed and included this short term loan in the ratio calculations thus catching every student out.

I would be interested in others' opinions of this.

This also calls into question the validity of computer based assessment because if the model answer is incorrect what chance does a student have when a machine is marking your paper? This disrepancy could be the difference between competent and not competent.

Andypandy

I always understood the gearing ratio to be long term debt/equity+long term debt. Please don't confuse me any more......

SandyHood

Gearing is a single title for many different ratios:

In PEV/MAC I would tend to use the same one as Andypandy

I advise you to state your formula, and then use it.

mattyj3nks

i would use...........debt / equity + debt

mrspnut

Sandy,

This for me is one of the worst part of the ratios, it isn't consistent and my other huge bug bear is they keep using the word ratio and then expecting a percentage instead.

Thanks for your replies people, I have amended my wall chart of ratios so I can get this in my head before next week.