Gearing Ration

Miss Dazy
Miss Dazy Registered Posts: 34 ? ? ?
I am also having truble with the gearing ratios...If i am given the long term loans of £800, and share capital of £100, are they the only figures i need?

i.e. 800 x 100 / 100 + 800 = 800

or should there be more figures that i should be putting in?

There is only the profit figure next to the share capital and there is no other long term debt.


  • sdv
    sdv Registered Posts: 585
    there are two ratios for gearing

    1 debt/equity = (800/100)x 100 = 800%

    2 debt/(equity + Debt) = [800/(800+100)] x100 = 89%

    Most of the time the second formula is used because it indicates how much of the company's assets are owned by non-equity holders.

    There is an obligation to pay interest charges on the borrowed amount.

    Should there be a down turn in business, there may be a risk of non payment of interest charges and a posibility that equity holders may lose all or a substancial value of the equity if the lenders force the company into liquidation for the non payment of interest payment.

    PS net profit is part of equity. you will have to add the net profit and share capital to arrive at Equity value.
  • Jimmyboy1888
    Jimmyboy1888 Registered Posts: 32 ? ? ?

    Gearing ratio = long term loan/long term loan + equity

    Hope this helps
  • A-Vic
    A-Vic Registered Posts: 6,970
    gearing ratio is long term loan/shareholders funds + long term loan x 100

    so in your case it is 800/800 + 100 x 100


    = 88.9%
  • anitag
    anitag Registered Posts: 17 Dedicated contributor ? ? ?
    gearing ratios?

    i have my exam next week and haven't heard or been taught about gearing ratios? Which module i it for?
  • Rinske
    Rinske Registered Posts: 2,453
    I think it comes around in ECR?, PEV or PCR, MAC and DFS.

    Often it's called slightly different depending on the unit though.

    If you do auditing or CMCC it would be in there as well, but those are skilltests.
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    If you start from the formula rather than what it shows it can be a chore to understand whereas if you start from the information you want and work back to the formula it might make more sense.

    If my house is worth £200,000 and I still owe £120,000 on the mortgage I have long term liabilities representing 60% of my capital.

    If my car is worth £2,500 and I owe £1,000 then 40% of the capital is borrowed

    You can go into book after book in your university/college library and see gearing in the context of the subject the book has been written - and there are a lot of ratios but if you use it for what you want to use it, then the ratio drops into the analysis rather than the analysis looking for a formula.
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