1. Gearing ratio By Lachy, Vicente and Aprile

2. Gearing ratio Gearing measures the percentage of a firms capital employed that comes from long-liabilities, such as debentures and mortgages. The gearing ratio is an accounting used to assess a firms long term liquidity position. Shareholders and investors are interested in the gearing ratio as it helps assess the level of risk.

3. Example For example a firm long term liabilities total 5 million whilst its capital employed is 20 million, calculate the gearing ratio? Step 1: Locate the formula in the data booklet. Step 2: Identify numbers given from extract and substitute into formula Step 3: State as a percentage Gearing ratio = 25%

4. What does this all mean? If the gearing ratio is over 50%, the firm is considered to be ‘highly geared’. Such firms a vulnerable for increases in interest rate since it has to make large repayments of interest and capital. If the gearing ratio is less than 50%, then the firm is considered to be ‘low geared’. Since its repayments do not form a significant proportion of its regular outgoings.

5. Relation to financial statements Balance statement In regard to the balance sheet capital employed will be represented at the bottom of the statement. In order to balance the statement the ‘money’ sourced from capital employed will be spread amongst fixed assets, current and non-current assets.