Business – 10.2 Analysis of published accounts – Gearing ratio | e-Consult
10.2 Analysis of published accounts – Gearing ratio (1 questions)
Login to see all questions.
Click on a question to view the answer
First, determine total debt (long‑term debt + current liabilities):
| Long‑term debt | £2,400,000 |
| Current liabilities | £600,000 |
| Total debt | £3,000,000 |
Gearing ratio = Total debt ÷ Shareholders’ equity = £3,000,000 ÷ £3,000,000 = 1.0 (or 100%).
Interpretation: A gearing ratio of 1.0 means the company has an equal amount of debt and equity. This indicates a moderate level of financial risk – the firm is not overly reliant on borrowing, but it also benefits from the potential advantages of debt financing such as tax shields. Management should monitor cash flows to ensure interest obligations can be met, especially if earnings become volatile.