Leverage or gearing ratios, Finance Basics

Leverage or Gearing Ratios

Leverage or gearing ratios are as follow:

a) Debt ratio = Total debts/Total assets

Whereas total debt = fixed charge capital + liabilities.

The ratio signify the proportion of total assets such has been financed with long term and current liabilities as a debt ratio of 0.45 mean 45% of net asset has been financed along with debt though the remaining 55% was financed along with owners equity/capital.

b) Times interest earned ratio  = Operating profit (earnings before interest and tax)/ Interest Charges

TIER called also interest coverage ratio.

These ratios signify the number of times interest charges can be paid from operating advantages. The higher the TIER, such better the firm signifying that either the firm has its interest charges are low or high operating profits.

Whether TIER is high due to low interest charges, so these signify low level of gearing/debt capital of the firm.

Posted Date: 1/30/2013 2:03:37 AM | Location : United States

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