Capital Gearing Ratio Analysis

Capital gearing ratio analysis is a very important building block for value investing. Anybody who reads the statements about financial without using a calculator, or want to solve his issues without using any kind of tool should read capital gearing ratio analysis. Usually, it measures the affiliation between the funds delivered by collective stock holder and funds delivered by those who collect an episodic interest or bonus at static rates. By doing so, a person can solve his problems without making any kind of model and save his time. It is a shortcut for calculating the financial values of different companies.

How to solve Problems without using any kind of tool?

At first, I never ever solve any problem regarding the financial issues without using any kind of tool. In capital gearing ratio analysis, operating margins are a key in comparing the progress of companies competing in the same sector. This can be done by adding past depreciation and amortization of companies. Sometimes, this method is very useful for spotting the stocks which needs to be recovered. 

Here, we consider a scenario to further understand this term. Suppose, I find a company which is making 3 percent return on its sales, whereas the competitors are making profit of 10-20 percent with the same business. If management can get margins up to 10 percent then I can work out what that would be on flat sales (or sales slightly down, if they're aiming to cut out unprofitable lines of business), and estimate what earnings per share would be at that level of operating margin. 

I look at the number of ratios which compare the balance sheet and all the values related to profits which playing an important part in progress of the company. The importance of these values and figures is that they show and tells you that how much amount of money you are investing and how much profit is returning from company  

 I have to stress on the fact that this is not a rocket science. It is just a trick. You just have to compare the values which helps a company to make progress and you get your required result without using any kind of tool or software. It is just a simple and nice trick.

 In the end, one last thing that needs to be done with spreadsheet before you finished your work is to proofread your work and check all the values and figures very carefully. Check all the past records of all the companies. It can surprise you what happens when you calculate and compare the second half of all the values and check the progress of revenue. A company, which is making a lot of progress and gain a lot of profits is because they make a model which splits in two parts. Each part contains 6 months. In each part, all the profits and investments are calculated. In this way, a company makes progress by leaps and bounds. It is not necessary that every time this methods works but in most of the cases it works and companies made a lot of profits 

It is concluded that capital gearing ratio analysis is a method which works in a very effective way and increase the profit of companies, increased their ranking. You just have to focus and pay proper attention in gaining access to this method or trick. It helps a lot of companies in increasing their profit. The only thing which you need most in this method is that you should check again and again all the values which helps a company in gaining profit and by doing so you can calculate the profit of the company without using any kind of software or without taking any help from anywhere. In other words, we can also say that such analysis is a shortcut for calculating the profits of the companies.

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Formula of the Gearing Ratio (Example)

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
Capital Employed
Gearing Ratio
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.

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