A gearing ratio is a category offinancial ratgame ios that compare company debt relative sầu to financial metrics such as total equity or assets. Investors, lenders, and analysts sometimes use these types of ratquả táo khổng lồ assesshow a company structures itself and the amount of risk involved with its chosen capital structure.
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What Is a Gearing Ratio?
A gearing ratio is a measurement of a company"s financial leverage, or the amount of business funding that comes from borrowed methods (lenders) versus company owners (shareholders). Well-known gearing ratios include debt-to-equity, debt-to-capital and debt-service ratgame ios.
Although financial leverage & financial risk are not the same, they are interrelated. Measuring the degree to which a company uses financial leverage is a way lớn assess its financial risk.
Lenders may use gearing ratquả táo lớn decide whether or not lớn extover credit, and investors may use them lớn determine whether or not khổng lồ invest in a business. A higher gearing ratio usually indicates higher financial risk.
While there is no phối gearing ratio that indicates a good or bad structured company, general guidelines suggest that between 25% & một nửa is best unless the company needs more debt to operate.
How Do You Calculate a Gearing Ratio?
There are many types of gearing ratios, but a common one to use is the debt-to-equity ratio. To calculate it, you add up the long-term và short-term debt và divide it by the shareholder equity. If you don"t have sầu any shareholders, then you (the owner) are the only shareholder, and the equity in this equation is yours.
Long-term debt includes loans, leases, or any other size of debt that requires payments at least a year out. Short-term debt usually requires payment within a year.
How Gearing Rattiện ích ios Work
If your company had $100,000 in debt, and your balance sheet showed $75,000 of shareholders" or owners" equity, then your gearing ratio would be about 133%, which is generally considered high.
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Raising capital by continuing lớn offer more shares would help decrease your gearing ratio. For example, if you managed to raise $50,000 by offering shares, your equity would increase to $125,000, and your gearing ratio would decrease to lớn 80%.
Another method to decrease your gearing ratio is lớn increase your sales in an attempt to lớn increase revenue. You could also try to lớn convince your lenders to convert your debt into lớn shares.
Limitations of Gearing Ratquả táo
The results of gearing ratio analysis can add value lớn a company"s financial planning when compared over time. But as a one-time calculation, gearing ratgame ios may not provide any real meaning.
It"s also important khổng lồ rethành viên that although high gearing ratio results indicate high financial leverage, they don"t always mean that a company is in financial digăng. While firms with higher gearing ratquả táo generally carry more risk, regulated entities such as utility companies commonly operate with higher debt levels.
Monopolistic companies often also have a higher gearing ratio because their financial risk is mitigated by their svào industry position. Additionally, capital-intensive sầu industries, such as manufacturing, typically finance expensive sầu equipment with debt, which leads to lớn higher gearing ratgame ios.
For this reason, it"s important lớn consider the industry that the company is operating in when analyzing it"s gearing ratio, because different industries have sầu different standards.
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A gearing ratio compares the funds a company borrows relative sầu lớn its equity, or capital.Different types of gearing ratgame ios exist, but a common one is the debt-to-equity ratio.A higher gearing ratio usually indicates higher financial risk to stockholders & lenders.It"s important lớn consider the industry and type of company when analyzing và comparing gearing ratquả táo.
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