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.
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
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 company’s equity shareholders as it is the profit that the company retains after paying off all the fixed obligations, including preference dividends.
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.