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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Advantages of high gearing:
- Increases the potential return on equity because debt is usually cheaper than equity, amplifying profits for shareholders when the business performs well.
- Provides tax benefits, as interest payments are tax‑deductible, reducing the company’s taxable profit.
Disadvantages of high gearing:
- Elevates financial risk; fixed interest obligations must be met regardless of profit levels, which can lead to solvency problems during downturns.
- May limit future borrowing capacity and can deter investors who view high debt as a sign of instability.