Gearing Ratio

columbia
columbia Registered Posts: 580 Epic contributor 🐘
in AAT Level 4 (Level 8 in Scotland)
Hi Guys

Hope you are all well on this lovely snowy day!

I have a skills test this evening, and try as I might I can never remember the correct formula for working out gearing ratios. :confused1:

I have a couple of formulas written down, can someone simplify it for me please so I can cram it into my addled brain over the next few hours!!

Thanks

Trace

Comments

  • Mrskingy
    Mrskingy Registered Posts: 20 New contributor 🐸
    Hi there

    This may or may not help! But I will give it a go.

    Gearing ratios assess the amount of long term capital in the company as this can be an element of risk.

    Loan capital/capital employed x 100

    Loan capital could be debenture stock.

    I was studying ratios on Friday last week and gave myself a big headache.
    Good luck for tonight!
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
    There are many gearing ratios
    The one of the most common is the one Trace wrote
    Loan capital/capital employed x 100
    My advice, irrespective of the formula you use, spell out exactly what you have done
    i.e. Ratio name....formula in words....working/calculation.....the ratio itself.....your interpretation
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com
  • columbia
    columbia Registered Posts: 580 Epic contributor 🐘
    Hi Mrskingy and Sandy

    Thanks a lot for the advice

    Not sure why this particular formula gets me in a tizzy!

    I will take all of your valued points on board, and hopefully if it comes up in tonights skills test I will be able to work it out correctly now!

    Thanks again

    Trace
  • taskey
    taskey Registered Posts: 1,800 Beyond epic contributor 🧙‍♂️
    this is not even in my bpp book

    thanks everyone

    Tracy
  • hanapospis
    hanapospis Registered Posts: 111 Dedicated contributor 🦉
    Hi Everyone,

    Could anyone explain me a term "capital Employed"? I am so confused

    ROCE = profit before taxation and interest / Capital Employed

    Borrowing ratio = Loan capital / Total Capital Employed

    What is the different between Capital Employed and Total capital Employed?

    I thought that the capital Employed = Fixed assets +current assets -current liabilities - long term liabilities ( the same as a the amount in section "financed by" in BS...

    So confused... and the exams are so close.....
  • PAMDILL
    PAMDILL Registered Posts: 721 Epic contributor 🐘
    taskey wrote: »
    this is not even in my bpp book

    thanks everyone

    Tracy
    Or in the Kaplan book, nice to know for once both of us have an essential item missing. SOmeone else posted a while back that it was in the Unit 11 book, lot of use that is? Don't want to have to buy a course I don't need yet.
  • PAMDILL
    PAMDILL Registered Posts: 721 Epic contributor 🐘
    hanapospis wrote: »
    Hi Everyone,

    Could anyone explain me a term "capital Employed"? I am so confused

    ROCE = profit before taxation and interest / Capital Employed

    Borrowing ratio = Loan capital / Total Capital Employed

    What is the different between Capital Employed and Total capital Employed?

    I thought that the capital Employed = Fixed assets +current assets -current liabilities - long term liabilities ( the same as a the amount in section "financed by" in BS...

    So confused... and the exams are so close.....
    I am not sure but is it not possibly the same thing but written out by a different parson?
  • wolfe
    wolfe Registered Posts: 121 Dedicated contributor 🦉
    hi everyone

    CAPITAL EMPLOYED = CAPITAL AMOUNT(THAT IS SHAREHOLDERS FUNDS, RESERVES ETCT ETC) + LONG TERM LIABILITIES

    keep in mind capital is different frm capital employed

    ps:hanapospis Fixed assets +current assets -current liabilities - long term liabilities IS CAPITAL NOT CAPITAL EMPLOYED
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
    This appears to be a confusing thread.
    1. Total Capital Employed = Capital Employed
    2. As a balance sheet by definition, balances you can find how much has been invested in the business in different ways.
    3. Way number 1. Fixed Assets (or Non-current assets) plus Current Assets less Current Liabilities
    4. Way number 2. Shareholders Funds (Equity including OSC and Reserves) plus Long-term liabilities

    Some examiner questions don't help (but I'd say I'm happy with the AAT examiners on this topic)

    NB for MAC and PEV
    I Do not expect to see ROCE questions on either paper.
    The examiner prefers to use RONA, and net assets are
    1. Way number 1. Fixed Assets (or Non-current assets) plus Current Assets less Current Liabilities less long term liabilities
    2. Way number 2. Shareholders Funds (Equity including OSC and Reserves)
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com
  • taskey
    taskey Registered Posts: 1,800 Beyond epic contributor 🧙‍♂️
    SandyHood wrote: »
    Do not expect to see ROCE questions on either paper.
    The examiner prefers to use RONA, and net assets are
    1. Way number 1. Fixed Assets (or Non-current assets) plus Current Assets less Current Liabilities less long term liabilities
    2. Way number 2. Shareholders Funds (Equity including OSC and Reserves)


    that would have stumped me in the PEV exam for sure.

    Thanks Sandy, as ever you are brill.

    Tracy
  • taskey
    taskey Registered Posts: 1,800 Beyond epic contributor 🧙‍♂️
    PAMDILL wrote: »
    Or in the Kaplan book, nice to know for once both of us have an essential item missing. SOmeone else posted a while back that it was in the Unit 11 book, lot of use that is? Don't want to have to buy a course I don't need yet.

    i have just bought unit 11 (ever hopeful i will pass 8&9) so i will dig it out and fax what i have again if that is ok?

    Tracy
  • Khurram Taj
    Khurram Taj Registered Posts: 29 Regular contributor ⭐
    Gearing Ratio

    Gearing ratio is an excellent tool for professional analysts . It is simply a comparison of the company's debt and its equity, to determine who's really finacing the company's operations- the shareholders or the bank.

    The standard formula is :

    Gearing = Loans/loans+equity capital

    if the gearing figure is more than 60%, it is generally reported high; 100% is very high.

    Less than 20% could be taken as low. but in all cases it depends upon the prevailing circumstances at the time and what point of comparison is.
  • PAMDILL
    PAMDILL Registered Posts: 721 Epic contributor 🐘
    taskey wrote: »
    i have just bought unit 11 (ever hopeful i will pass 8&9) so i will dig it out and fax what i have again if that is ok?

    Tracy
    Fantastic, I was holding off on Unit 11 as Kaplan automatically enter you for the next exam sitting no matter what you say when you order the material and then charge you £50 to change the date. I am going to try and get Unit 10 out the way first.

    Was thinking of swapping Providers but posted a thread asking what would happen about assessing my portfolio if I changed and no-one has answered so no idea what to do.

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