Funding and Gearing: Difference between pages

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1.
'''1.''' <br />
<i>Financial gearing</i> measures the relative amount of debt in a firm's capital structure.<br />
Gearing is sometimes also known as <i>leverage</i>.


Medium to longer term borrowing by a non-financial undertaking to meet its operational needs.


Gearing and leverage ratios can be calculated in several different ways, so consistency of approach is important.


:<span style="color:#4B0082">'''''Fund early'''''</span>


:"... the ease with which treasurers have secured debt funding may start to lessen.
Two essential bases to define are:


:As panellists pointed out, the situation calls to mind the ACT's mantra: fund early, fund often and fund long."
i. The use of book or market values.<br />
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D / (D+E).


:''The Treasurer magazine, December 2018 / January 2019, p13''.


<span style="color:#4B0082">'''Example 1: Calculation of gearing'''</span>


<i>Gearing</i><br />
Assume the values of debt and equity are equal, say USD 1m each.<br />
D/E = 1/1 = 100%.<br />
This is usually known as 'gearing'.


2.


More generally, the provision or the sources of finance necessary for the continuing operation of an undertaking.
<span style="color:#4B0082">'''Example 2: Calculation of leverage'''</span>


In this context, sources of finance for non-financial organisations would include, bank lenders, bondholders and shareholders.
<i>Leverage</i><br />
Using the other calculation with the same inputs (D = 1 and E = 1):<br />
D / (D+E) = 1/2 = 50%.<br />
This is usually known as 'leverage'.




3.
<b>Adjustments to D and E figures</b><br />
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.<br />
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.


More broadly, sources of finance including certain other creditors, as well as bank lenders, bondholders and shareholders.


<b>Bank supervision</b><br />
In the banking context, the calculation of the regulatory [[Leverage Ratio]] is strictly specified, following [[Basel III]].


4. ''Pensions.''


The provision in advance for future liabilities in a defined benefit pension scheme by the accumulation of assets.
<b>Expression of gearing figures</b><br />
Gearing may be expressed as a percentage (eg 100%), a number (eg 1) or a proportion (eg 1:1).




5. ''Banking.''
'''2.''' <br />
<i>Operational gearing</i> relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.


In the banking context, sources of funding include retail customer deposits and equity, as well as wholesale and longer term borrowings.


Banks' funding - very broadly - can be categorised as 'own funds' or 'borrowed funds'.
'''3.''' <br />
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.<br />
The intention of gearing up is to improve expected net results.  <br />
A consequence of gearing up is normally to increase risk, and the cost of equity capital.




== See also ==
Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.
* [[Accrued benefits funding method]]
 
* [[Available Stable Funding]]
 
* [[Borrowed funds]]
==See also==
* [[Capital]]
* [[Balance sheet ratio]]
* [[Defined benefit pension scheme]]
* [[Basel III]]
* [[ESG funding]]
* [[Cost of equity]]
* [[FFL]]
* [[Debt equity ratio]]
* [[Flighty]]
* [[Debt to equity ratio]]
* [[Fund]]
* [[Geared beta]]
* [[Funding concentration risk]]
* [[Guide to risk management]]
* [[Funding level]]
* [[Intangible assets]]
* [[Funding liquidity risk]]
* [[Interest cover]]
* [[Funding management]]
* [[Leverage]]
* [[Funding method]]
* [[Leverage Ratio]]
* [[Funding ratio]]
* [[Leveraged]]
* [[Funding risk]]
* [[Leveraged takeover]]
* [[Funding stack]]
* [[Levered]]
* [[Funds]]
* [[Levered beta]]
* [[Liquidity]]
* [[Long-term solvency ratio]]
* [[Loan to stable funding ratio]]
* [[Off balance sheet finance]]
* [[Net Stable Funding Ratio]]
* [[Tax shield]]
* [[Prospective benefits funding method]]
* [[Ungeared]]
* [[Own funds]]
* [[Ungeared cash flow]]
* [[Required Stable Funding]]
 
* [[Scheme Specific Funding]]
 
* [[Stability]]
===Other links===
* [[Statement of funding principles]]
[http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, Will Spinney, The Treasurer]
* [[Statutory funding objective]]
* [[Sticky]]
* [[Term out]]


[[Category:Corporate_finance]]
[[Category:Corporate_finance]]
[[Category:Long_term_funding]]

Revision as of 20:01, 9 February 2019

1.
Financial gearing measures the relative amount of debt in a firm's capital structure.
Gearing is sometimes also known as leverage.


Gearing and leverage 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).


Example 1: Calculation of gearing

Gearing
Assume the values of debt and equity are equal, say USD 1m each.
D/E = 1/1 = 100%.
This is usually known as 'gearing'.


Example 2: Calculation of leverage

Leverage
Using the other calculation with the same inputs (D = 1 and E = 1):
D / (D+E) = 1/2 = 50%.
This is usually known as 'leverage'.


Adjustments to D and E figures
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.


Bank supervision
In the banking context, the calculation of the regulatory Leverage Ratio is strictly specified, following Basel III.


Expression of gearing figures
Gearing may be expressed as a percentage (eg 100%), a number (eg 1) or a proportion (eg 1:1).


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.
A consequence of gearing up is normally to increase risk, and the cost of equity capital.


Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.


See also


Other links

Masterclass: Measuring financial risk, Will Spinney, The Treasurer

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