7.2f Ratios - Gearing Flashcards Preview

Business Studies A2 > 7.2f Ratios - Gearing > Flashcards

Flashcards in 7.2f Ratios - Gearing Deck (14)
Loading flashcards...
1
Q

What are the two main sources of capital/funds?

A
  • Start-up capital/retained profit

- Borrowings

2
Q

What does gearing show?

A

The proportion of the business’ capital employed that has been bought/built using long term borrowings

3
Q

Is lower or higher gearing usually better?

A

Lower

4
Q

What does gearing focus on?

A

Long-term financial stability of the business

5
Q

What do you need to look out for in gearing?

A

Increased gearing and deterioration in other liquidity/financial efficiency rations

6
Q

Gearing formula

A

Gearing (%) = (long term liabilities ÷ capital employed) x 100

7
Q

Over 50% in the gearing formula means what?

A

Highly geared

8
Q

Below 50% in the gearing formula means what?

A

Lowly geared

9
Q

What does it mean if a business is highly geared?

A

A high proportion of the organisation’s funds have been borrowed externally

10
Q

Advantages of high gearing

A
  • Borrowing can be cheap
  • If ROCE is high, could borrow to invest/spend
  • Fewer shareholders so less loss of control
  • Gain a competitive advantage by borrowing extra funds for growth
11
Q

Advantages of low gearing

A
  • Reduces risk of business downturn

- Borrow more/quicker

12
Q

Implements of reducing gearing

A
  • Focus on profit improvement
  • Repay long-term loans
  • Retain profits
13
Q

Implements of increasing gearing

A
  • Focus on growth
  • Convert short-term debt into long-term loans
  • buy back ordinary shares
14
Q

Disadvantages of high gearing:

A
  • Less likely potential investors will buy shares as business need to pay interest before dividends
  • May not be able to afford repayments if interest rates rise

Decks in Business Studies A2 Class (74):