Capital gearing ratio – Meaning & Example

Capital gearing ratio represents the relationship between equity share capital of a firm and its fixed interest bearing funds. Fixed interest bearing funds include preference share capital, debentures, bonds and other type of loans which bear a fixed rate of interest on it.

This ratio is used to measure the ‘degree of leverage’ of a firm. A firm having low capital gearing ratio will be called as highly leveraged and vice versa.

Formula for computing capital gearing ratio:

Capital gearing ratio can be calculated by using below given formula:

Equity share capital / fixed interest bearing funds

Where:

Equity share capital refers to total share capital minus preference share capital.

Example:

Let’s assume that ABC Ltd Company has following figures on its balance sheet:

2012 2013
Equity share capital 1,00,00,000 90,00,000
Preference share capital 28,00,000 45,00,000
Debentures 25,00,000 30,00,000
Bonds 27,00,000 37,50,000

Using the above given figures, we are able to calculate capital gearing ratio for year 2012 and 2013 separately.

For the year 2012:

1,00,00,000 / 80,00,000 = 1.25 : 1

For the year 2013:

90,00,000/ 1,12,50,000 = 0.8 : 1

The above results show that the company was low geared (leveraged) in 2012 whereas it was highly geared (leveraged) in the year 2013.

Vikas Sharma is the chief author at Monetary Section. He is an MBA (finance) from GJIMT Mohali. He started his career in 2014 and at the same time he started this website. He is young enthusiast who loves to educate people about finance. To reach out to the people from all territories, he chose internet as a medium.

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