Table of Contents
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.