operating gearing

This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.

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October 22, 2018 at 9:10 am #479438
toushiga
Participant
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Hello Tutor,I have a question from Becker question bank
Q:
“Kent Co had sales growth of 10% over the past year.EBIT grew by 15% and earning per share grew by 25% over the same period
Which of the following statements regarding Kent Co’s gearing is correct?
A Total gearing is equal to 0.9
B Total gearing is equal to 2.1
C Financial gearing is equal to 0.6
D Operating gearing is equal to 1.5
”
Answer is D
I wonder how it’s being calculated?
Operating gearing formula : Contribution / PBIT or Fixed cost /total costs
October 22, 2018 at 4:34 pm #479473
John Moffat
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As I state in my lectures, there is not standard measure of operating gearing.
It should be clear however from my lecture that it must be due to operating gearing that EBIT is growing faster than sales. 15%/10% = 1.5
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