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Chapter 11
2.4 Measuring risk
Financial gearing = Debt × 100 or = Debt
Equity Debt + equity
This is the long term debt as a percentage of equity. A high level of gearing
indicates that the company relies heavily on debt to finance its long term needs.
Operating profit
Interest cover =
Finance cost
A decrease in the interest cover indicates that the company is facing an
increased risk of not being able to meet its finance payments as they fall due.
Dividend cover = Net profit
Dividend
A decrease in the dividend cover indicates that the company is facing an
increased risk of not being able to meet its dividends payments as they fall due.
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