Business – 10.2 Analysis of published accounts – Gearing ratio | e-Consult
10.2 Analysis of published accounts – Gearing ratio (1 questions)
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Answer 3:
| Company | Debt (£m) | Equity (£m) | Gearing Ratio (%) |
|---|---|---|---|
| A | 8 | 4 | (8 ÷ 4) × 100 = 200% |
| B | 3 | 6 | (3 ÷ 6) × 100 = 50% |
Interpretation:
- Company A’s gearing ratio of 200% indicates it has twice as much debt as equity, signifying high financial risk.
- Company B’s gearing ratio of 50% shows a more conservative capital structure with debt only half of equity.
- Based on gearing alone, Company B is in a stronger financial position because it carries less relative debt and therefore lower financial risk.