CONFUSED..gearing..&..industry average...????????????? (1 Viewer)

[sal17]

what are 'strategies to improve the gearing of a business'...????
what is gearing....can someone plllllsss explain evrthng about gearing..
and industry average...
thanks

 

[seano77]

Gearing is debt to equity or in other words total liabilities÷owners equity.
A strategy would be to issue shares to raise owners equity, pay off debt, factoring to reduce current liabilities. And an industry average is the average level of grearing and you can compare your businesses ratio to the average to find out how you compare.

 

[sal17]

thanks=] is it basically the same thing as solvency??
and can strategies be:
control of current assets:
- cash, reciavbales, inventory
control of current liabilites
-payables, overdraft, loans
??

 

[cardinalsfan70]

Gearing is debt to equity or in other words total liabilities÷owners equity.

i have a question regarding this ratio. depending on where i look it will say the gearing ratio is total liabilities/owners equity OR long-term liabilities/owners equity. the wikipedia article on it says that both can be used interchangably. so which effing one do i use?

 

[seano77]

Yeah but since from the ratio Total liabilities encompasses both current and non-current liabilities you would only mention control of current liabilities (payables, overdraft, loans) in strategies to improve solvency as an alteration of current assets will not have any effect on gearing.

Be careful though cause those are strategies under the effective profitability management heading.

 

[seano77]

i have a question regarding this ratio. depending on where i look it will say the gearing ratio is total liabilities/owners equity OR long-term liabilities/owners equity. the wikipedia article on it says that both can be used interchangably. so which effing one do i use?

Go with Total liabilities over owners equity. The majority of textbooks I've seen have this. Also the concept of debt to equity means all debt as a company will always have short term debt, so thats why it includes current liabilities as well.

 

[Juliaan]

Gearing is Solvency ~

All liabilities / Owners Equity = Gearing Ratio.