Gearing

Question 1

What does gearing measure and what does it focus on

Answer 1

Measures the proportion of assets that are invested in a business that are financed by long term borrowing
- focuses on long term financial stability of a business

Question 2

Gearing equation

Answer 2

Non current liabilities / (total equity + non current liabilities) x 100

Question 3

Ways to reduce gearing

Answer 3

• focus on improving profit e.g cost minimisation
• repay Long term loans
• retain profits rather than pay dividends
• Issue more shares
• convert loans into equity

Question 4

Ways to increase gearing

Answer 4

• focus on growth - invest in revenue growth rather than profit
• convert short term debts into long term loans
• Buy back ordinary shares
• pay increased dividends out of retained earrings
• issue preference shares or debentures