Accounting Lecture Notes 10

Accounting Lecture Notes 10 - Business Performance Analysis...

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Business Performance  Analysis 2 Gearing and Investment Ratios
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Gearing and Investment Gearing : Ratios relating to this aspect are  concerned with the extent to which lenders  and creditors finance the business. Investment : Ratios relating to this aspect are  concerned with the performance of the  business from the perspective of an existing  or potential shareholder 
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Gearing ratios Financial Structure How much financing  from debt and how  much from equity Ungeared Limited Geared Limited £000 £000 Ordinary share capital plus reserves 100 20 10% debentures ___ 80 100 100
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Gearing Ratio Long term Debt as a % of Total Shareholders Equity  + Long term Debt Has the company borrowed a lot of money? Ungeared company …low borrowing = 0% ( 0/100) Geared Company…high borrowing =  80% (80/ 100) High Gearing ratio (over 50%) Possible problems Can company meet interest payments? Shareholders returns at risk 
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Gearing and Change in Profit  Geared Company Year 1 Year 2 Year 3 Operating Profit 10000 20000 5000 Interest 8000 8000 8000 ( 10% of Debt Return to shareholders 2000 12000 -3000 Ungeared Company Operating profit 10000 20000 5000 Interest 0 0 0 Return to shareholders 10000 20000 5000
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Gearing ratios Long-term (non-current) liabilities Share capital + Reserves + Long-term (non-
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Accounting Lecture Notes 10 - Business Performance Analysis...

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