There are
different representations of gearing ratio formula with example. The ratio that
is calculated is similar however the representation of the formula is
different. Below are the few representations of the formula of the gearing
ratio.
Gearing Ratio = Long Term Debt/ Share
Holder Equity
Gearing Ratio = Long Term
Liabilities/ Capital Employed
Capital Gearing Ratio = Equity Share
Capital/ Fixed Interest accepting Funds
Gearing ratio is further used to calculate the Gearing ratio
percentage. The gearing ratio percentage can be calculated as:
Gearing Ratio Percentage = Long Term
Liabilities/ Capital Employed x 100
In the above mentioned formula the long term liabilities
include loans due within more than one year, shares and mortgages. Where as
capital employed includes distributed capital, retained earnings and long term
liabilities.
Example to Calculate Gearing Ratio
The table
contains the data to calculate gearing ratio
2012 ($,000)

2011 ($,000)


Long Term
Liabilities

1,200

1,450

Capital Employed

5,655

4,675

Gearing Ratio

21.2%

31.0%

The table shows that the gearing ratio in the year 2011 was
31.0 percent where as in 2012 the gearing ratio decreased to 21.2 percent. The
decrease in the gearing ratio is due to the decrease in the long term
liabilities of the firm and increase in the working capital of the firm.
Another formula to calculate gearing ratio can be introduced
as under:
Gearing Ratio = (Long Term
Borrowings+ short term loans +overdraft) – cash /Share Holders Funds x 100
The above mentioned formula shows that gearing ratio is the
measure of the financial leverage of a company. Here we are calculating gearing
ratio by using company’s long term borrowing and dividing it with the total
funds provided by the share holders. Gearing ratio can also be calculated as
simple debt to equity ratio as mentioned above.