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Capital Gearing Ratio Explained

The capital gearing ratio analyzes a company's capital structure by comparing equity share capital and reserves to fixed-interest bearing funds like debentures and long-term loans. It measures the proportion of a company's capital that is financed by long-term debt versus owners' equity. The capital gearing ratio is calculated by dividing equity share capital by fixed-interest bearing funds such as debentures, preference shares, and other long-term loans. This ratio indicates the financial leverage of a company and tests its long-term financial position.

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111 views1 page

Capital Gearing Ratio Explained

The capital gearing ratio analyzes a company's capital structure by comparing equity share capital and reserves to fixed-interest bearing funds like debentures and long-term loans. It measures the proportion of a company's capital that is financed by long-term debt versus owners' equity. The capital gearing ratio is calculated by dividing equity share capital by fixed-interest bearing funds such as debentures, preference shares, and other long-term loans. This ratio indicates the financial leverage of a company and tests its long-term financial position.

Uploaded by

Balaji Gajendran
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CAPITAL GEARING RATIO:

DEFINITION AND EXPLANATION:


Closely related to solvency ratio is the capital gearing ratio. Capital
gearing ratio is mainly used to analyze the capital structure of a company.
The term capital structure refers to the relationship between the various
long-term form of financing such as debentures, preference and equity share
capital including reserves and surpluses. Leverage of capital structure ratios are
calculated to test the long-term financial position of a firm.
The term “capital gearing” or “leverage” normally refers to the
proportion of relationship between equity share capital including reserves and
surpluses to preference share capital and other fixed interest bearing funds or
loans. In other words it is the proportion between the fixed interest or dividend
bearing funds and non fixed interest or dividend bearing funds. Equity share
capital includes equity share capital and all reserves and surpluses items that
belong to shareholders. Fixed interest bearing funds includes debentures,
preference share capital and other long-term loans.

FORMULA OF CAPITAL GEARING RATIO:


[Capital Gearing Ratio = Equity Share Capital / Fixed Interest Bearing Funds]

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