A large, well established business’ annual accounts read that their long-term liabilities are £6.3 million, and their capital employed is £11.2 million. Evaluate their gearing ratio.

Gearing ratio is the capital structure of a company. It demonstrates the proportion of the business that is financed by debt in relation to shareholder equity.It currently stands that this business’ gearing ratio is 56.25%. Typically, this might be viewed as a high gearing ratio, however this is a large and well-established business. This perhaps indicates that the business has strong and stable cash-flows and therefore can access capital to service debts. A weak cash-flow yet a high gearing ratio can be risky as building capital to service debts may be difficult. This particular business may be focusing on growth and therefore has accessed more long-term debt as it is usually cheaper, and shareholders do not have to invest more capital. 

SB
Answered by Stephanie B. Business Studies tutor

1831 Views

See similar Business Studies A Level tutors

Related Business Studies A Level answers

All answers ▸

What is 'Gearing' and how is it interpreted?


How can Business Studies help me?


The directors of a well-known food manufacturing PLC have announced that they are moving production from the UK to Europe in order to reduce costs. This will result in the loss of 115 jobs. To what extent is this decision likely to benefit the business’


What is the Supply?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2025

Terms & Conditions|Privacy Policy
Cookie Preferences