Interpretation analysis qstn

This topic has 4 replies, 2 voices, and was last updated 1 year ago by cadhakan.

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January 23, 2021 at 7:25 am #607600
cadhakan
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Siya co carries its property at revalued amount. Property values have fallen during the current period and an impairment loss has been recognised on the property, however it’s carrying amount is still higher than its depreciated historical cost. What is the effect of the impairment on the ROCE and Gearing ratios?

Ans ::

The effect of this impairment will increase in ROCE and increase in gearing ratio.

Sir I am not able to understand why increase in both ROCE and gearing ratios. Can you please explain me why…it will really great help from you. Thank you in advance.
January 23, 2021 at 9:53 am #607638
P2-D2
Keymaster
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Hi,

As the value of the property has fallen then the capital employed will have fallen, hence an increase in ROCE. Effectively we are making the same returns on a smaller asset base.

As the impairment will have reduced the profits, it will also have reduced the equity balance via the retained earnings, hence an increase in the gearing. Effectively we have the same level of debt but a lower asset base as security, which is more risky, and hence shown by an increased gearing.

Thanks

Thanks
January 23, 2021 at 12:54 pm #607659
cadhakan
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So if property Value have risen than ROCE and gearing both decrease??
January 26, 2021 at 7:19 pm #608150
P2-D2
Keymaster
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Hi,

If the number on the bottom of the ratio (denominator) increases then the ratio will fall as you are dividing by a larger number.

Thanks
February 3, 2021 at 4:03 pm #608993
cadhakan
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Oh I see I. Understand now thank you so much sir.
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