High gearing

• What is the formula for the gearing ratio?

  Non-current liabilities divided by capital employed
• Why is a high gearing ratio a concern for a business?

  It suggests the business is highly leveraged
• What happens to the cost of servicing debt with a higher gearing ratio?

  It increases due to higher debt levels
• What is the risk associated with interest rates for businesses with high gearing ratios?

  Increased interest rates raise debt servicing costs
• How can a high gearing ratio affect a business during economic downturns?

  It may lead to insufficient cash inflows to pay debts
• What does reduced financial flexibility due to high gearing ratios imply for a business?

  Inability to seize market opportunities
• How does a high gearing ratio impact a business's ability to invest in R&D?

  It limits investment due to high debt obligations
• Why might investors view a high gearing ratio negatively?

  It signals potential financial instability
• What could happen if investors sell shares due to high gearing ratios?

  Share prices may decline significantly
• When might a high gearing ratio be seen as a positive sign?

  If it results from strategic expansion into profitable markets
• What could be a problematic reason for a high gearing ratio?

  Declining sales leading to increased debt
• How do interest rates affect the concern level of a high gearing ratio?

  Low interest rates reduce concern, high rates increase it
• Why is the trend of interest rates important for businesses with high gearing ratios?

  Trending upwards increases debt servicing concerns
• What does the long-term history of profits indicate for businesses with high gearing ratios?

  Stable profits help manage high gearing ratios
• How does the nature of the industry affect the perception of high gearing ratios?

  Some industries commonly have high gearing ratios
• Why might real estate businesses have high gearing ratios?

  They require significant initial fixed costs
• How do tech companies typically finance their operations compared to other industries?

  They often rely on equity rather than debt
• What does a high gearing ratio indicate about a business's financial health?

  It is usually not a good indicator of prosperity
• What is the conclusion regarding high gearing ratios?

  They depend on the root cause of the ratio