Gearing - debt to equity

• Overall


  The ratio measures the level of debt in comparison to money invested by owners/shareholders → see if the debt invested is a good investment

  As a percentage

  Comes from the balance sheet

  Purpose: ability to meet long-term debt (to improve gearing), low debt = higher equity
• Strategies


  increase total equity by selling new shares and lowering dividend payments, renegotiate loans, decrease debt; sell non-current assets to pay off their debts
• What does it indicate


  Above 1:1 the business has too much debt, threatening long-term survival. The lower the debt to equity ratio, the higher the solvency of the business. However, below 1:1 return on equity is not being maximised and they could borrow more money to generate better returns

  A high ratio like Victoria's would have a large amount of interest to repay and also that the business is vulnerable if lenders demand repayment