How Do I Calculate Thee, Gearing?

Hi MJ,

I am currently reviewing some mock answers but am having trouble with the calculation of gearing levels on one of the mocks.

The mock question gives me $3,088m as debt and $1,411m as equity.

The mock answer calculates gearing ratio as $3,088m / ($3,088m + $1,411m) = 69%. However, in the preseen analysis and also on your masterclass, we calculated gearing at 2.2 ($3,088m / $1,411m), which is in fact the same as debt-equity (219%).

I am confused to how many different gearing level calculation method exists?

Can you please maybe clarify?

Thank you
Katarina

gearing


Hi Katarina

Both calculations are actually valid and correct.

To put your mind at ease, I lifted the following details from a CIMA article on calculating gearing ratios:

“The gearing ratio is derived either by dividing the company’s debt by its equity (giving a number) or by dividing the debt by the sum of the debt and the equity (giving a %). Use whichever method you like to calculate it unless the examiner specifies the one to apply. Equity is the figure for total equity on the statement of financial position. Debt is the figure for long­-term debt on the statement of financial position. This includes pension liabilities. An overdraft should also be included in the debt figure if it’s being used as a long-­term source of finance, but not if it’s a very short­-term measure.

Hope this helps.

Your tutor
MJ

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