Tuesday, 11 April 2017
Loans $6 million
Shareholders' funds $3 million
The purpose of this ratio is to compare the finance provided by the banks and other borrowing with the finance invested by shareholders.
It is a ratio much used by banks, who may not like to see a ratio of 1 to 1 (or some other such proportion) exceeded.
The ratio is sometimes expressed as a proportion as in 1 to 1.
Sometimes it is expressed as a percentage: 1 to 1 is 50% because borrowing is 50% of the total.
Gearing is said to be high when borrowing is high in relation to shareholders' funds.
This can be dangerous but shareholders' returns will be high if the company does well
This is what is meant by being highly geared.