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Sir John please clarify the difference between the use of the two formula
1. Gearing ratio = Long term debt ÷ ( long term debt + equity)
2. Gearing ratio = long term debt ÷ equity
Thank you
They are both accepted ways of measuring gearing.
If you are asked to calculate then it doesn’t matter which formula you use (you still get full marks even though they give different answers), unless (as is most often the case) the question specifies which measure to use.
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