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Interpretation of financial statements

Financial position ratios

6.1 Introduction

The primary focus of financial position ratios is to assess financial stability and
exposure to risk.

6.2 The gearing ratio

Gearing is a measure of the relationship between the amounts of finance provided by
external parties (e.g. loan finance) to the total capital employed. Higher levels of
gearing are usually seen to be higher risk due to mandatory repayments.

The gearing ratio is calculated as follows:

Debt
× 100%
Total capital employed

225