A gearing ratio is a category offinancial ratios that compare company debt relative to financial metrics such as total equity or assets. Investors, lenders, and analysts sometimes use these types of ratios khổng lồ assesshow a company structures itself & the amount of risk involved with its chosen capital structure.
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What Is a Gearing Ratio?
A gearing ratio is a measurement of a company"s financial leverage, or the amount of business funding that comes from borrowed methods (lenders) versus company owners (shareholders). Well-known gearing ratios include debt-to-equity, debt-to-capital & debt-service ratios.
Although financial leverage and financial risk are not the same, they are interrelated. Measuring the degree to which a company uses financial leverage is a way khổng lồ assess its financial risk.
Lenders may use gearing ratgame ios lớn decide whether or not to lớn extkết thúc credit, & investors may use them khổng lồ determine whether or not to lớn invest in a business. A higher gearing ratio usually indicates higher financial risk.
While there is no set gearing ratio that indicates a good or bad structured company, general guidelines suggest that between 25% & một nửa is best unless the company needs more debt to lớn operate.
How Do You Calculate a Gearing Ratio?
There are many types of gearing ratios, but a common one khổng lồ use is the debt-to-equity ratio. To calculate it, you add up the long-term & short-term debt và divide it by the shareholder equity. If you don"t have any shareholders, then you (the owner) are the only shareholder, & the equity in this equation is yours.
Long-term debt includes loans, leases, or any other size of debt that requires payments at least a year out. Short-term debt usually requires payment within a year.
How Gearing Rattiện ích ios Work
If your company had $100,000 in debt, & your balance sheet showed $75,000 of shareholders" or owners" equity, then your gearing ratio would be about 133%, which is generally considered high.
Raising capital by continuing khổng lồ offer more shares would help decrease your gearing ratio. For example, if you managed lớn raise $50,000 by offering shares, your equity would increase to $125,000, & your gearing ratio would decrease khổng lồ 80%.
Another method khổng lồ decrease your gearing ratio is to lớn increase your sales in an attempt lớn increase revenue. You could also try to lớn convince your lenders to convert your debt into lớn shares.
Limitations of Gearing Ratgame ios
The results of gearing ratio analysis can add value to lớn a company"s financial planning when compared over time. But as a one-time calculation, gearing ratquả táo may not provide any real meaning.
It"s also important lớn rethành viên that although high gearing ratio results indicate high financial leverage, they don"t always mean that a company is in financial distress. While firms with higher gearing ratgame ios generally carry more risk, regulated entities such as utility companies commonly operate with higher debt levels.
Monopolistic companies often also have sầu a higher gearing ratio because their financial risk is mitigated by their svào industry position. Additionally, capital-intensive industries, such as manufacturing, typically finance expensive sầu equipment with debt, which leads to higher gearing ratgame ios.
For this reason, it"s important to lớn consider the industry that the company is operating in when analyzing it"s gearing ratio, because different industries have different standards.
A gearing ratio compares the funds a company borrows relative sầu to lớn its equity, or capital.Different types of gearing ratquả táo exist, but a common one is the debt-to-equity ratio.A higher gearing ratio usually indicates higher financial risk khổng lồ stockholders và lenders.It"s important to lớn consider the industry và type of company when analyzing and comparing gearing rattiện ích ios.