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Interpretation of financial statements

Long-term financial stability

3.1 Gearing: calculation

Debt
—————— × 100%

(Debt + Equity)

Debt includes all long-term borrowings, e.g. loan notes, redeemable preference
shares.

Equity includes all elements of equity, e.g. share capital, reserves, non-controlling
interest.

3.2 Alternative gearing measure - debt: equity: calculation

Debt

——————
Equity

3.3 High and low gearing

High gearing Low gearing

Large proportion of Scope to increase
fixed-return capital borrowings for potential

Greater risk of new projects

insolvency Borrow more easily

Proportionately greater Perceived as lower risk
returns to shareholders
if profits are growing

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