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Hi John, I usually calculate the gearing as NCL/(NCL+EQUITY).
In equity we also have Reserves which I usually include in the calculation.
In Sep/Dec 2017 in High K question, the examiner calculate the gearing as NCL/(NCL+Ordinary shares) excluding reserves.
I don’t understand, which one is the correct way to calculate gearing?
Cheers,
A.
If we are using values from the SOFP (i.e. book values) then we do use share capital + reserves as the value of equity.
However, if we are using market values to calculate the gearing (which is much more meaningful and is more common in AFM), then the value of equity is just the MV of the shares. We do not then add on the reserves because they are effectively included in the MV – the most obvious reason for the MV being higher than the nominal value of the shares is because of retained earnings 🙂
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