My concept about gearing ratio is not clear, (what it is and for what purpose it is presented), A detail explanation with example is much appreciated . Thank you.
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Gearing Ratio
It's a ratio that indicates the extent to which a company is dependent upon external finance (ie not shareholders' finance)
In times of plenty a fixed interest loan is often seen as a good thing because the funding is helping to achieve super profits but is costing the company only a fixed amount of interest. Effectively using other people's money to generate profits for yourself.
However, in times of hardship, fixed interest borrowing can represent a heavy burden on a company and the interest can represent a disproportionate percentage of the pre-tax profits
Ok?
Many thanks, so the less gearing ratio the better picture for company .
Depends upon your degree of self confidence - if you think that you could earn at a rate faster than the rate of interest you have to pay then a high gearing ratio is good
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