Question

If debt is 220 cash balance is 20 and equity is 300 then the gearing ratio is

Answer 1

In this case, gearing ratio = (220/300) = 0.73 which is a good gearing ratio.

Any financial ratio which highlights the efficiency of a business in utilising borrowed funds come into the category of gearing ratios. The total amount of debt is divided by equity capital to find the gearing ratio of a business.

Examples of gearing ratios –

Interest earned ratio = ( earning before income tax/total interest).

Debt-equity ratio = ( total debt/ total equity).

Debt ratio = (total debts/total assets).

Equity ratio =(total equity/total assets

Answer 2

Gearing ratio is the ratio between debt and equity, where the debt means the financial liabilities with interests and equity means the market value of the share capital.

Therefore, in this case the debt 220, equity 300 and cash balance 20, then the gearing ratio is debt / equity x 100, which means 220 / 300 x 100 = 73%.