Capital Gearing Ratio

The Capital Gearing Ratio, also known as the Financial Leverage Ratio, is a financial metric that measures a company's level of indebtedness and its ability to meet its long-term financial obligations. Formula: Capital Gearing Ratio = (Long-term Debt / Shareholders' Funds) x 100 Where: - Long-term Debt: Includes debts with a maturity period of more than one year, such as bonds, loans, and mortgages. - Shareholders' Funds: Includes equity share capital, reserves, and retained earnings. Interpretation: - A high Capital Gearing Ratio indicates that a company is heavily reliant on debt financing, which can increase the risk of default and bankruptcy. - A low Capital Gearing Ratio indicates that a company is relying more on equity financing, which can reduce the risk of default and bankruptcy. Acceptable Ratio: The acceptable Capital Gearing Ratio varies depending on the industry and company. However, as a general rule, a ratio of: - 25-50% is considered low and indicates a low level of indebtedness. - 50-75% is considered moderate and indicates a moderate level of indebtedness. - 75% or higher is considered high and indicates a high level of indebtedness.