|Miss Chee by e-mail query wrote:|
|I have just opened up a company 7 months back and after much try, we have been awarded grant to go further with the product manufactured. I like to know the meaning of gearing ratio and how it applies|
Dear Miss Chee
Many thanks for your query. Gearing Ratio is a financial term that covers the process of comparing your capital/equity against your creditors. But in your case, you have been granted a grant which is different from serviceable loans.
Anyway, I will just explain in general.
Gearing will help benchmarkng your leverage (gearing) of finance to ascertain the degree that your funding of the company against your creditors amount of fund. The higher gearing, the more risk your company will be exposed to. It is a good practice to research further by taking/benchmarking against your competitors to ascertain the best acceptable ratio.
The basic calculations is total debt divided by total equity, times interest earned (EBIT* / total interest), equity ratio (equity / assets), and debt ratio (total debt / total assets).
(*EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income)(Operating Income = Operating Revenue – Operating Expenses)