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I was wondering if someone could help me on how the gearing ratio should be calculated when looking at a company’s statement of financial position. For debt, should I be looking at long term debt/current debt? The company in consideration has grouped together borrowings and their bank overdraft under current liabilities, would this be a problem? The same for equity, I’m unsure of what figures I should be looking at, just the ordinary shares and reserves, or the total equity?
Any help would be appreciated.
Quote:I’m unsure of what figures I should be looking at, just the ordinary shares and reserves, or the total equityThere are two acceptable ways:
1. D/E
2. D/D+EObviously for equity, you would take total equity and for debt, you would take non-current liabilities such as 8% Loan Note.
You may wish to incorporate bank overdraft, if it is significant as that would also affect the financial gearing.
Whatever you do, whichever formula you use, make sure to state your assumptions.
HTH
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