Page 295 - F3 -FA Integrated Workbook STUDENT 2018-19

Interpretation of financial statements

Financial position/stability ratios

4.1 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,
irredeemable preference shares, non-controlling interest.

4.2 Alternative gearing measure – debt: equity: calculation

Debt

——————
Equity

4.3 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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