Gearing Ratio

Joannesetter

Hi All,

If someone could help on the below please!

Task 7 in the AAT Cash and Treasury Management practise assessment is a question on gearing ratios which I just cant figure out.

The question is: A company has a 5 year loan of £500,000 and an overdraft of £50,000. Shareholders funds amount to £1,500,000. what is the gearing ratio?

I have been trying to use the following:
long term debt/equity
or
long-term debt/equity + long term debt

The answer should be 26.83% but I cannot get to this whatsoever!

can someone shed some light?

Thanks!!

georgeSO

Debt/Debt+ Equity so 500,000+50,000/1,500,000+500,000+50,000
OR 550,000/2,050,000 = 0.26829... x 100 = 26.83%

Joannesetter

Thanks George, now I feel stupid.

Why is the over-draft included in this?

I thought it was only long-term debt that was meant to be included.

Thanks

georgeSO

Not a problem.

If you scroll down a bit on this old post it's explained very well by SandyHood.

https://forums.aat.org.uk/discussion/32762/gearing-ratio-credit-management-and-controls-project

Hope this helps.

georgeSO

https://forums.aat.org.uk/discussion/32762/gearing-ratio-credit-management-and-controls-project