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IAI Actuarial Core Principles · Business Finance · Interpreting company accounting information

A company has equity share capital and reserves of ₹60 crore, 10% debentures of ₹30 crore and a bank term loan of ₹10 crore. Using the definition of gearing as total debt divided by equity (debt-to-equity), what is the gearing ratio?

Gearing as debt to equity is 66.7%. Total borrowings are ₹40 crore (debentures plus term loan) and equity is ₹60 crore, so 40 divided by 60 gives 66.7%. Using total capital of ₹100 crore as the denominator would give 40%, which is not the stated definition.

  1. A25.0%
  2. B40.0%
  3. C66.7%Correct
  4. D16.7%
  5. 100.0%

Explanation

Total debt = 30 + 10 = ₹40 crore. Equity = ₹60 crore. Debt/equity = 40/60 = 66.7%. The 40% figure divides debt by total capital (100), which is a different definition from the one stated; 25% uses only the debentures against capital employed wrongly.

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