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The interpretation of financial statements
Risk ratios
6.1 The gearing ratio
Gearing is a measure of the relationship between the amount of finance provided by
external parties (e.g. loan finance) to the total capital employed. Higher levels of risk
are usually seen to be higher risk due to mandatory repayments.
The gearing ratio is calculated as follows:
Debt
× 100%
Total Capital Employed
Illustrations and further practice
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