CAPTAL GEARING RATIO

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It is a modified version of debt- equity ratio.


The numerator includes long-term debt and preference share capital while the denominator includes equity share capital and reserves and surplus less: accumulated losses and fictitious assets.



Significance:

Gearing refers to the relationship between two different types of capital. This ratio serves as a guide in bringing about a balanced capital structure.


A company is said to highly geared when its fixed interest or fixed dividend bearing capital is greater than the equity shareholder’s funds and vice versa. (Advantages and disadvantages of high gearing and low gearing are the same as debt-equity ratio
 
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