Capital Gearing Ratio Formula & Example

Definition: Capital Gearing Ratio is used to analyze the capital structure of a firm. It indicates the relationship between various types of securities and capitalization such as debentures, preference share, reserves, etc. High geared means lower proportion of equity, while low geared means higher proportion of equity.

Formula:
Capital Gearing Ratio = Equity / Fixed Interest Bearing Funds
(Note: Fixed interest bearing funds include debentures, preference shares and long-term loans; Equity includes Equity share capital, Free reserves, and Profits and loss account balance)

Or,
Capital gearing ratio = Prior charge capital / Total capital
(Note: Prior charge capital is capital carrying right to fixed return; Total capital is 'total assets less current liabilities')

Or,
Capital gearing ratio = (Preference share capital + Debentures + long term borrowings) / Equity funds

Example:
UOL Ltd has the following information:
Equity Share Capital $500,000
Long Term Loans $650,000
Reserves and surplus $400,000
10% Debentures $150,000
Then, Capital Gearing Ratio = (500,000 + 400,000) / (650,000 + 150,000) = 9 : 8

* Next: Proprietary Ratio Formula & Example

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