Understanding Gearing Ratio and How to Alter It

The video tutorial explains the concept of the gearing ratio, which is the ratio of non-current liabilities to capital employed, expressed as a percentage. It provides a live example to calculate the gearing ratio and discusses the implications of low and high gearing levels on business stability. The tutorial also explores how economic conditions, such as booms and recessions, affect gearing. Finally, it outlines strategies for reducing a high gearing ratio, including paying off loans, issuing more shares, and retaining profits.

What is the formula for calculating the gearing ratio?

• Non-current liabilities divided by capital employed

• Current liabilities divided by total assets

• Current liabilities divided by capital employed

• Non-current liabilities divided by total assets

In the example provided, what is the gearing ratio if a firm has $50 million in long-term debts and $200 million in capital employed?

• 20%

• 25%

• 30%

• 35%

What is a potential risk for a business with high gearing during a recession?

• Increased profitability

• Higher interest rates

• Loss of borrowed finance leading to collapse

• Increased market share

Which of the following is NOT a method to reduce a high gearing ratio?

• Increasing non-current liabilities

• Retaining more profits

• Issuing more shares

• Paying off loans

How can a firm increase its capital employed to reduce the gearing ratio?

• By issuing more shares

• By taking more loans

• By reducing profits

• By increasing non-current liabilities