Capital Structure Ratio

Gearing/Leverage/Capital Structure Ratio

1. The ratio signifies the extent whether the firm has borrowed fixed charge capital to finance the acquisition of the assets or resources of the firm.
2. The two basic gearing ratios are as:

a) Debt/equity ratio = Fixed charge capital/Equity (net worth)

This ratio signify the amount of fixed charge capital in the capital structure of the firm for each one shilling of owners capital or equity as a ratio of 0.78 means for every Sh.1 of equity there is like Sh.0.78 fixed charge capital.           

b) Fixed charge to total capital ratio = (Fixed charge capital x 100)/Total capital employed

Whereas net capital employed = Fixed charge capital + equity relative to net capital working via the firm as a ratio of 0.38 means such, 38% of the capital working is fixed charge capital.