What on Earth is Gearing? ๐ยง
Imagine a company as a cyclist pedaling up a hill. The cyclist can choose different gears for different terrains. Gearing in accounting is pretty similar! Itโs the flashy term for the relationship between the funds given to a company by ordinary shareholders (the chilled out pedal-pushers) and the long-term funds that come with a fixed interest charge, like debentures and preference shares (the sturdy, sturdy gears).
Types of Gearing ๐ดโโ๏ธยง
- Capital Gearing: The percentage of a companyโs capital that is funded by stockholdersโ equity versus long-term debt.
- Equity Gearing: Focuses solely on the comparison of equity-related funds.
- Financial Gearing: This is all about the long-term, fixed-interest funds munching on your profits. High financial gearing means high debt - looking at you, overzealous shopper! ๐
Once upon a High Gearing ๐ยง
Having high gearing is like having an over-enthusiastic dog pulling you on a steep downhill walk. It can lead to higher returns when things are going well, but oh boy, youโd better hold on tight when the going gets rough! ๐ช๏ธ
It means a companyโs fixed charges on debt are higher compared to other cool dudes in the market. Investors, watch out! High gearing companies could be speculative investments for the ordinary shareholder and come with their roller-coaster risks and rewards.๐ข
Gearing vs Leverage โ A Transatlantic Traverse ๐ยง
The term โgearingโ is essentially Britainโs posh cousin to Americaโs โleverage.โ Yes, leverage has crossed the pond and is becoming rather trendy in the UK. One could say itโs
