Category: Dictionary

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.

Proprietor’s fund refers to total investment made by owner(s) of a business enterprise. In other words, it indicates the value of total assets of a business enterprise after deducting its long and short terms liabilities.

Formula for calculating proprietor’s fund:

It can be calculated by using below given formulas:

Total Assets – Total Liabilities

(Here total liabilities include only long and short term liabilities.)

OR

Equity + Preference share capital + Reserves & Surplus.

After going through the above given formulas, it is clear that proprietor’s fund is nothing more than the amount of capital invested by owner(s) of a business firm.

Proprietor’s fund is used to calculate proprietary ratio. This ratio helps in measuring the proportion of owner’s fund in relation to the total assets of business. Here total assets include both owner’s fund and outsider’s fund.

Formula for proprietary ratio:

Proprietary ratio is calculated by below mentioned formula:

Proprietary ratio = Proprietor’s fund / Total assets.

Mortgage is a debt instrument refers to a legal agreement between two parties wherein one party owns some debt from the other party. The lender of money is known as mortgagee and borrower of money is known as mortgagor.

The loan is given by the mortgagee in exchange of the title of any property of borrower which becomes void at the time of full repayment of loan by the mortgagor. The terms of the contract defines the interest rate also, which the borrower has to pay on the amount so borrowed.

In case of any default in payment of interest or principal by the mortgagor, the property so engaged becomes the property of mortgagee. Mortgages are also known as “liens against property” or “claims on property”.

Fiscal deficit refers to the difference between a government’s revenue and expenditure. it means when a government’s total expenditure exceeds its total revenue, the deficit is known as fiscal deficit.