Gearing: Difference between revisions
imported>Administrator (CSV import) |
imported>Doug Williamson m (Spacing 27/8/13) |
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''Financial gearing'' measures the relative amount of debt in a firm's capital structure. | ''Financial gearing'' measures the relative amount of debt in a firm's capital structure. | ||
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i. The use of book or market values. | i. The use of book or market values. | ||
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D/[D+E]. | ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D/[D+E]. | ||
Historically, use of the D/E version of the measure was more common in the UK. | Historically, use of the D/E version of the measure was more common in the UK. | ||
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions. | With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions. | ||
Practitioners may also adjust the Equity figure, for example to exclude intangible assets. | Practitioners may also adjust the Equity figure, for example to exclude intangible assets. | ||
2. | 2. | ||
''Operational gearing'' relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs. | ''Operational gearing'' relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs. | ||
3. | 3. | ||
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation. | 'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation. | ||
The intention of gearing up is to improve expected net results. The consequence of gearing up is normally to increase risk. | |||
The intention of gearing up is to improve expected net results. | |||
The consequence of gearing up is normally to increase risk. | |||
Many financial disasters have been a consequence of gearing up (or leveraging) in this way in earlier periods. | Many financial disasters have been a consequence of gearing up (or leveraging) in this way in earlier periods. | ||
== See also == | == See also == | ||
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* [[Ungeared]] | * [[Ungeared]] | ||
* [[Ungeared cash flow]] | * [[Ungeared cash flow]] | ||
Revision as of 11:47, 27 August 2013
1.
Financial gearing measures the relative amount of debt in a firm's capital structure.
Gearing ratios can be calculated in several different ways, so consistency of approach is important.
Two essential bases to define are:
i. The use of book or market values.
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D/[D+E].
Historically, use of the D/E version of the measure was more common in the UK.
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.
2.
Operational gearing relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.
3.
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.
The intention of gearing up is to improve expected net results.
The consequence of gearing up is normally to increase risk.
Many financial disasters have been a consequence of gearing up (or leveraging) in this way in earlier periods.
