How is the gearing ratio calculated?

The formula for calculating the gearing ratio is as follows: gearing ratio = (total liabilities ÷ total assets) x 100%, which is an important indicator of the level of indebtedness and the degree of risk of the enterprise.

Expanded Information:

What is the Load Ratio

From the standpoint of the creditors, they are most concerned about the degree of safety of the various financing methods and whether the principal and interest can be recovered on schedule, etc. If the capital provided by the shareholders is only a small proportion compared with the total assets of the enterprise, the risk of the enterprise is mainly borne by the creditors, which is unfavorable to the creditors. Therefore, the creditors hope that the lower the gearing ratio the better, the enterprise debt servicing is guaranteed, and the funds financed to the enterprise will not have too much risk.

Folding

From the investor's standpoint, what the investor cares about is whether the profitability of all capital exceeds the rate of interest on the borrowed capital, i.e., the interest rate on the borrowed funds. Assuming that the rate of profit on all capital exceeds the rate of interest, the profit received by the investor will increase, and if, on the contrary, the rate of profit on all capital is applied to be lower than the rate of interest on the borrowed capital, the profit received by the investor will decrease, which is unfavorable to the investor. Because the excess interest on borrowed capital to be used to make up for the share of profits received by the investor, and therefore in all capital profitability is higher than the interest rate on borrowed capital, the investor would like to gearing ratio the higher the better, otherwise vice versa.

From the standpoint of the operator, if the amount of debt raised is very large, beyond the psychological tolerance of creditors, the enterprise can not finance. The larger the borrowed funds (of course, not blind borrowing), the more the enterprise appears to be full of vigor. Therefore, the operators hope that the gearing ratio is a little higher, through debt management, expanding the scale of production, expanding the market, enhance the vitality of the enterprise, to obtain higher profits. Generally speaking, the higher the current ratio of assets, the more creditors are assured, but the current ratio is too high, it will make part of the funds stay in the form of current assets, affecting the profitability of enterprises. Therefore, enterprises should determine the current ratio of a more reasonable limit, below this limit, indicating that the gearing ratio is likely to be high, corporate credit has been damaged, and then debt will be difficult; higher than this limit, indicating that a portion of the funds are idle, the use of funds is not efficient, resulting in a waste of funds.

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