Capital Gearing Ratio Calculator

Capital Gearing Ratio

It is a ratio showing the relationship of the company between the owners’ funds and external funds with fixed payout commitments. A company with more equity is termed as a low geared company as it does not have a high liability of paying off fixed interest or dividends. While a company having more fixed cost-bearing funds is referred to as highly geared. The calculation of the capital gearing ratio calculator is important in the case of raising more money using the debt option. The lenders may not be willing to lend money to a company which is already having more fixed cost-bearing funds in its capital structure or a company that is highly geared.

Formula

In order to calculate the capital gearing ratio, we divide common shareholders’ funds or common shareholders’ equity by fixed cost-bearing funds. A mathematical representation of the same is as follows:

Capital Gearing Ratio = Common Shareholders’ Equity / Fixed Cost Bearing Funds

Capital Gearing Ratio Calculator

Calculator

How to Calculate using Calculator?

The user has to enter the following figures into the calculator:

Common Shareholders’ Equity

It refers to all the funds belonging to equity shareholders of the company. These funds include capital contributed by equity shareholders and the accumulated profit of the company. These accumulated profits or reserves of the company belong to the equity shareholders of the company. As it is the profit that the company retains after paying off all the fixed obligations including preference dividend.

Fixed Cost Bearing Funds

Fixed cost-bearing funds refer to such sources of funds that come with an obligation of fixed payments. It includes long-term borrowings (bank loans, bonds, debentures, etc.) plus preference capital.

Example

Assume that a company has $90,000 as equity share capital and $450,000 as reserves and surplus. The sources of funds with fixed charges of the company include 5% debentures of 300,000, 12% preferred stock of $250,000, and short-term borrowings of $260,000.

Owners’ Funds or Equity Shareholders’ Funds = 90,000 + 450,000 = 540,000

Fixed Cost Bearing Funds = 300,000 + 250,000 + 260,000 = 820,000

Capital Gearing Ratio = 540,000 / 810,000 = 2:3 Or 0.67:1.

Here, the company is having more funds that bear a fixed cost in comparison to owners’ funds. This states that the company is highly geared.

This ratio is also financial leverage for the company. And, we generally consider financial leverage good for a company provided that the company has enough earning capacity to regularly discharge its fixed payment obligations.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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