£,000

         Sales                                          4,000

         Trade receivables                         650

         Cash in hand                                  20

         Bank overdraft                            1,200

         Retained earnings                     11,640

         Purchases                                  1,800

         12% long-term loan                     2,400

         Trade payables                             330

         Cost of sales                               1,500

         Ordinary share capital                 3,500

 

Closing inventory as at 31 December 2022 was £600,000.

What is the Gearing ratio for this firm as at 31 December 2023? (to 2 decimal places)

The **Gearing ratio** measures the proportion of a company's financing that comes from debt compared to its equity, providing insight into its financial risk. It is commonly calculated using the following formula:

\[
\text{Gearing Ratio} = \frac{\text{Debt}}{\text{Debt} + \text{Equity}} \times 100
\]

Where:
- **Debt** is typically long-term debt, which includes the **12% long-term loan** and the **Bank overdraft**.
- **Equity** includes **Ordinary share capital** and **Retained earnings**.

Let's calculate the Gearing Ratio based on the provided figures.

1. **Debt:**
   - Long-term loan = £2,400,000
   - Bank overdraft = £1,200,000
   \[
   \text{Total Debt} = 2,400,000 + 1,200,000 = 3,600,000
   \]

2. **Equity:**
   - Ordinary share capital = £3,500,000
   - Retained earnings = £11,640,000
   \[
   \text{Total Equity} = 3,500,000 + 11,640,000 = 15,140,000
   \]

3. **Gearing Ratio:**
   \[
   \text{Gearing Ratio} = \frac{3,600,000}{3,600,000 + 15,140,000} \times 100
   \]
   \[
   \text{Gearing Ratio} = \frac{3,600,000}{18,740,000} \times 100 \approx 19.21\%
   \]

The **Gearing Ratio** for the firm as of 31 December 2023 is **19.21%**.

Would you like more details or have any other questions?

Here are five related questions to consider:
1. What is a safe level for the gearing ratio?
2. How would an increase in long-term loans affect the gearing ratio?
3. Can retained earnings impact the gearing ratio significantly?
4. How does the gearing ratio compare with other leverage ratios?
5. What are the potential risks of having a high gearing ratio?

**Tip:** A lower gearing ratio typically indicates lower financial risk, as the company relies less on external borrowing.

What is the Gearing ratio for this firm as at 31 December 2023? (to 2 decimal places)

Learn how to calculate the Gearing Ratio for a firm as at 31 December 2023. This problem provides a detailed solution using financial data, such as long-term loans, retained earnings, and share capital. Understand the key formula and its application in determining financial leverage, suitable for finance and accounting students.

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