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Business_A-level_Cie

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  1. business-and-its-environment

    enterprise
    6 主题
  2. business-structure
    6 主题
  3. size-of-business
    3 主题
  4. business-objectives
    3 主题
  5. stakeholders-in-a-business
    2 主题
  6. external-influences-on-business
    12 主题
  7. business-strategy
    10 主题
  8. human-resource-management
    human-resource-management-hrm
    8 主题
  9. motivation
    4 主题
  10. management
    2 主题
  11. organisational-structure
    5 主题
  12. business-communication
    5 主题
  13. leadership
    2 主题
  14. human-resource-strategy
    3 主题
  15. marketing
    the-nature-of-marketing
    7 主题
  16. market-research
    3 主题
  17. the-marketing-mix
    6 主题
  18. marketing-analysis
    5 主题
  19. marketing-strategy
    3 主题
  20. operations-management
    the-nature-of-operations
    3 主题
  21. inventory-management
    2 主题
  22. capacity-utilisation-and-outsourcing
    1 主题
  23. location-and-scale
    2 主题
  24. quality-management
    1 主题
  25. operations-strategy
    4 主题
  26. finance-and-accounting
    business-finance
    2 主题
  27. sources-of-finance
    3 主题
  28. forecasting-and-managing-cash-flows
    1 主题
  29. costs
    4 主题
  30. budgets
    1 主题
  31. financial-statements
    4 主题
  32. analysing-published-accounts
    6 主题
  33. investment-appraisal
    2 主题
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The meaning and importance of gearing

  • Gearing shows the balance between debt and equity finance in a business

    • High gearing means a business has a high level of borrowing in relation to equity capital

      • A business with high gearing is higher risk but could potentially generate higher returns

    • Low gearing means a business has a low level of borrowing in relation to equity capital

      • A business with low gearing is lower risk but fast growth may be limited as it has a more cautious approach to borrowing

Why is gearing important?

  • Assesses financial risk

    • High gearing means higher risk, as the business must make regular loan repayments and pay interest, even if profits fall

  • Useful for lenders and investors

    • Banks and investors use the gearing ratio to judge whether the business can afford to take on more debt or is too risky to support

  • Helps in decision-making

    • Businesses with low gearing may choose to borrow more to expand, while highly geared firms may focus on reducing debt before growing

The gearing ratio

  • The gearing ratio is calculated using the formula and is expressed as a percentage

Gearing space ratio space equals fraction numerator space Non minus current space liabilities over denominator Capital space employed end fraction space straight x space 100

  • Capital employed is calculated using the formula

Capital space employed space equals space Issued space shares space plus space Reserves space plus space Non minus current space liabilities

  • The higher the gearing ratio, the more dependent a business is on long-term borrowing

Worked Example

The table shows an extract from the company accounts of Walders Travel Ltd

 

$

Current assets

6.2 million

Current liabilities

3.4 million

Non-current liabilities

9.6 million

Capital employed

43.3 million

Calculate Walders Travel Ltd’s gearing ratio.

(2)

 Step 1: Identify data required to calculate the gearing ratio

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