Gearing Ratio

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi Could somebody please explain the gearing ratio.
Sandy Hood said it might be on the PEV(On one of his revision course)I remember doing it at college but carn't remember how to do it. Please help :? regards Heather

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Gearing Ratio

    Hi
    I honestly cannot say for sure I remember this correctly, but I think I remember something like

    Long term debt / Long term debt + equity

    But double check
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Gearing Ratio

    Hi Heather.

    Gearing ratio is debt divided by equity.

    The ratio shows how much a company is financed by debt - shouldn't be more than 70% ideally.

    Scott.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Gearing Ratio

    Debt divided by equity is often cited as gearing (and I am sure you can quote authors where they use it)

    If gearing appears in the PEV exam, I recommend that you use debt divided by debt + equity.

    This is the examiner's preference

    If you can't find a figure for equity because the question essentially provides a statement of assets and liabilities rather than a balance sheet, then (as you no doubt know already)
    the NBV of fixed assests plus the net current assets would give you exactly the same figure as debt + equity.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Gearing Ratio

    When you say debt, do you mean loans? Or debtors? Sorry if that's a stupid questions :oops:
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Gearing Ratio

    A good question

    I mean long-term loans.

    I do not include trade creditors which appear as part of the net current assets.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Gearing Ratio

    The formula is correct

    Debt divided by debt + equity

    Debt will be anything along the lines of borrowing money to finance buying and production therefore loans and as such but not debtors
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Gearing Ratio

    thanks for all your help and good luck to everybody who is sitting the PEV on Monday morning, wouldn't be long and I can have my life back!!!!
    regards Heather :D

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