Page 391 - F2 Integrated Workbook STUDENT 2019

Analysis of financial performance and position

Gearing

Alternative 1

Debt

–––––––––––––– = n:n

Equity Expressed as a ratio

Alternative 2

Debt

––––––––––––––––––––– × 100

Debt + Equity Expressed as a percentage

TUTOR GUIDANCE

 Gearing is used to determine risk associated with an entity.
 If an entity is highly geared there is a greater risk of:

– failing to service the entity’s debt finance (pay the interest)

– having finance withdrawn
– failing to obtain further finance from new financiers.

 Comparison to industry averages would be required to determine if gearing is
deemed high.

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