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.