Gearing

Tags

finance

Financial gearing (leverage) looks at how the company is financed.

If a business has a high level of non-current liabilities (debt) there
is a potential risk that in the medium-long term these loans cannot be
repaid and the business will fail (financial fisk).

See [see page 20, here] for a practical example of the impact of gearing.

Gearing (Debt to Equity) Ratio

\[ Debt/Equity = \frac{Loans + Overdrafts}{Share Capital + Reserves} \]

Interest Cover

Measures the ability of a business to [see page 15, meet] interest payable from operating profit. A business's ability to meet these profits implies its financial risk.

A low level of gearing implies a high interest cover ratio.

\[ Interest Cover = \frac{Operating Profit}{Interest Payable} \]