ACCA Applied Knowledge · Financial Accounting · Ratios
A company has equity of $600,000 (including retained earnings) and non-current liabilities consisting of $200,000 of 8% loan notes. It has no preference shares. Using the formula debt / equity, what is the gearing ratio?
The gearing ratio is 33.3%. Using debt divided by equity, the $200,000 of loan notes is divided by equity of $600,000. The 25% figure comes from using debt over total capital employed, which is a different formula from the one specified.
- A25.0%
- B33.3%Correct
- C75.0%
- D300.0%
Explanation
Debt/equity = 200,000 / 600,000 = 33.3%. The 25% figure uses debt / (debt + equity) = 200/800, which is a different formula from the one stated. 75% inverts and uses the wrong base.
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