[clivemarsh]

There are various definitions of gearing and of equity and loan capital. A simple definition of gearing is:
Gearing = Loan Capital/Equity.
Thus, if loan capital is £100K and equity is £200K gearing will be:
£100K/£200K
= 0.5

The important point is to demonstrate that you understand what gearing is – for example – a company that has low gearing is one that has a lot of equity to external debt.

You are right to be concerned as to how you should express this because different people express gearing in different ways and you need to ensure when comparing accounts that you are comparing ‘apples with apples’. You tutor should indicate which method the ACCA examiner prefers – if any.
Hope this helps
Clive Marsh, Author, Mastering Financial Management, Financial Times Prentice Hall

[Author]

Posts