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Hi
1.Debt: Non current liabilities (bank loans, bonds, finance lease, financial instruments, retirement benefit, provisions).
what shall I includes in debt data to calculate my gearing ratio or is it fine to take all non current liabilities as debt?
2.Equity: share capital, share premium, hedging reserve, own shares, translation reserve, retained earnings.
what I should include in total equity data for gearing ratio and what if total equity is a negative figure?
3.Number of shares: share capital, share premium.
When I am calculating DPS or EPS for number of shares shall I only take ordinary share capital or shall I also include share premium as well?
Thanks
There is concern about using deferred tax as part of the gearing calculation – it’s hardly “financing” is it. However, so long as your basis is consistent year on year, it should not matter what you include or exclude. If the basis is clearly explained to the “user” the user is then able to draw their own meaningful, informed conclusions.
He same comment goes for “Equity” – it’s generally taken to be all those elements that “belong” to the equity shareholders. So capital plus reserves.
If it’s negative equity, your company is in trouble!
Why on Earth would you include Share Premium? The idea of earnings per share is to calculate the earnings for the year per ……… the number of SHARES in issue!
Hello thanks for having this forum. Back to participant’s question, what if the share holders accumulated funds (equity) is negative how do you calculate gearing? I have personally seen a private company having a negative shareholders fund. Does the formula of debt/debt+equity still apply in which case the + sign would change to negative or we have to use a – sign instead to keep the formula as a positive?
Thanks in advance.
I’m an ACCA affiliate from Uganda.
This sounds more like a case for recommending a liquidation … before the directors get in deeper trouble for fraudulent trading
Personally I imagine that, in this situation (negative equity) no-one is particularly concerned about “+ signs that should be – signs”
To be honest with you, I don’t know the correct answer … it’s probably calculated in “the normal” way ie debt / debt + equity but, because we have negative equity, the equity value is deducted from the debt value and gives a gearing ratio > 1
Is it ok if i dont include long term provisions as part of debt while calculating gearing?
Also is government grant to be included in gearing calculation in the debt?I have said in an earlier post on this thread that, so long as you are consistent, it’s unlikely that the inclusion or omission of a particular line item is going to change the decisions of users
However, why would you want to exclude provisions?
Having said that, given the nature of provisions, they’re not likely to make a material difference to a gearing calculation
In addition, it depends on the nature of the provision. Are they really a form of financing?
Finally, I would have thought that government grants were certainly a form of financing and should therefore be taken into account
OK?
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