Gearing Ratio Q HELP!

LynMillManc

Hi I'm really getting confused about the below question..i just cant seem to get the correct %.....
Current portion of long term loan 126
Loan term loan 945
Retained profit 4898
Share Capital 500

The answer given is 17% but using the formula below i just can't get it
long term liabilities (945)
divided by
long term liabilities (945) + Share capital (500) + retained profit (4898)
multiplied by 100
Gives me 15%

What am i doing wrong????
Thanks in advance!

dsg1978

Potential without seeing the entire question you needed to add the current portion as the gearing equation used is total debt/ total debt + equity. I could be wrong but from your post that is how I would have answered it.

LynMillManc

This is what the trial balance shows....maybe I'm being really really thick???

dsg1978

As i mentioned you have missed the short term debt. You needed to include the 126 current portion and don't forget the overdraft in year 2005. So to make it clear how you get 17% from your original post:
Total debt 1071
Equity 5398
1071/ (1071+5398) = 0.1655
Round up 17%
Hope it's clearer now

dsg1978

The short term debt is easy to miss and I believe is a common mistake so hopefully this will help

LynMillManc

Ah yes it was the overdraft that I was totally missing, I could see how to get the 17% but not the 25%, thank you!
I hope it's clear as to whether I should calculate using the total debt or just long term debt as I thought the short term wouldn't be included in the gearing ratio.

dsg1978

If it doesn't say anything I would go by total debt. If they ask for long term or an other variation, I am sure they would state it in the question.