Capital Gearing Ratio
This is the most commonly used measure which quantifies the relationship between fixed return bearing debt-to-equity. It quantifies the relationship between long-term sources of finance bearing fixed costs (loans, debentures, bonds and preference shares) to equity (bearing variable cost).
The formula is
Fixed interest-bearing securities include preference share capital, debentures and long-term loans, which carry fixed rate of dividend and interest.
The higher this ratio the more vulnerable the company is perceived to be since there is high fixed commitment on its profits before equity interests can be satisfied. The standard ratio is 1. If the ratio is 1, then the firm is said to be evenly geared. If the ratio is more than 1 then the firm is highly geared i.e., major portion of funding is in the form of fixed interest-bearing securities. If the ratio is less than 1,
then the firm is low geared.
Following is the extract taken from the annual report of Tata Steel Limited. Calculate Capital Gearing Ratio.
"The company's secured loans includes fixed interest debentures of Rs.2,135.22 crore as on 31.03.06 as against Rs.2,342.68 crore in the previous year. Shareholders' fund for the same periods is Rs.9,502.03 crore and Rs.6,845.10 crore respectively".
Capital Gearing Ratio of Tata Steel for the years 2006-07 and 2005-06 is given below:
|
|
2006-07
|
2005-06
|
|
Fixed Bearing Securities (Rs. in crore) (A)
|
5885.89
|
2,381.13
|
|
Shareholder's fund (Rs. in crore) (B)
|
13,893.62
|
9,502.03
|
|
Capital Gearing Ratio (A) ¸ (B)
|
0.42
|
0.25
|
Company's capital gearing ratio is increased from 0.25 in 2005-06 to 0.42 in 2006-07. It indicates that the company has increased its fixed bearing interest securities. Ratios like debt-equity ratio, and capital gearing ratio indicate that the company is depending more on their internal resources than outside resources.
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