Can anyone please help with the Gearing ratio formula?

steph89steph89 Posts: 2Registered
As I understand the gearing ratio is long term borrowing / capital employed + long term borrowing × 100 . In an AAT mock it used both short term borrowing and long term / capital employed × 100 . It didnt add the long term borrowing to the capital employed and im wondering why? If there are 2 ways of doing the formula how will I know which is the correct one to use. Any help on this would be appreciated. Tia

Best Answer

  • Clintm15Clintm15 Well-Known FarehamPosts: 247
    Accepted Answer
    You're right to question it. There really isn't a single 'gearing ratio', but rather many gearing ratio's. For the purposes of your exam you need to know the exact specification the examiners are looking for, this needs to be made clear in either the exam you take or the syllabus.
    AAT
    Level 2 - 2011
    Level 3 - 2012
    Level 4 - 2013

    ACCA
    F4 - Corporate Law - Dec 2015 (passed)
    F5 - Performance Management - Dec 2014 (passed)
    F6 - Taxation - Dec 2013 (passed)
    F7 - Financial Reporting - Jun 2014 (passed)
    F8 - Audit & Assurance - Dec 2015 (passed)
    F9 - Financial Management - Jun 2015 (passed)
    steph89

Answers

  • Clintm15Clintm15 Well-Known FarehamPosts: 247Registered
    Long-term / capital employed would be the 'classic method', but generally the gearing ratio is just comparing debt to capital, the constitution of which is subject to discretion.
    AAT
    Level 2 - 2011
    Level 3 - 2012
    Level 4 - 2013

    ACCA
    F4 - Corporate Law - Dec 2015 (passed)
    F5 - Performance Management - Dec 2014 (passed)
    F6 - Taxation - Dec 2013 (passed)
    F7 - Financial Reporting - Jun 2014 (passed)
    F8 - Audit & Assurance - Dec 2015 (passed)
    F9 - Financial Management - Jun 2015 (passed)
    steph89
  • steph89steph89 Posts: 2Registered
    Thanks Clint I have only been taught to add long term to capital employed and didnt realise there were a "classic method". I was hoping in the exam it may state which method I would need to use but it didnt in the mock so I dont think it will. I think based on the mock answer i will presume it will want me to use the classic method unless it states otherwise.
  • BecxoBecxo Posts: 21Registered
    Hi Both,

    Just looking this exact query up myself... how do we know which method to use?!?!?
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