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Dear Tutor,
I have encountered some differences in the formulas used in the lecture notes and the study hub regarding the calculation of gearing ratios, and I would appreciate your guidance.
In the lecture notes:
we have:((Debt borrowing+ Preference share)/(Ordinary share capital + reserves))*100
or
((Debt borrowing+ Preference share)/Total long term capital) *100[in my understanding this {total long term capital} is simply Debt borrowing+ Preference share+ Ordinary share capital + reserves]
then as we dive into study hub we get the follows;
(Non-current liabilities/ (Capital + reserves)) *100
(question here is whether the so quoted capital here included preference shares or not and the non current liabilities as per my understanding clearly doesn’t include preference capital)
or
(Non-current liabilities/ Capital employed) *100
As per my understanding these two different approaches (One in the notes vs one in the study hub) doesn’t lead to the same readings, or do they?
The differences you’ve encountered in the formulas for calculating gearing ratios arise from variations in how capital components are defined and included in the calculations.
As the first approach which is from the lecture notes includes preference shares as part of the capital structure, while the second approach from the study hub may not, depending on the definition of what capital is. Look at what is given in the question it will be clear.
Sometimes preference shares are treated similarly to debt in certain contexts. It’s essential to clarify these definitions in the context of the question and specific calculations being performed.
Look at the question and see what information you are given. If it’s an OT from section A/B it will be clear, if it’s a section C question and you are unclear, then state your assumptions and answer it accordingly.
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