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Everything about Gearing Ratio

Questions › Category: Financials Quadrant › Everything about Gearing Ratio
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Thomas asked 5 years ago

Hi Victor/ Rusmin,
Recently, I came across an article (https://www.fool.sg/2013/08/23/what-is-gearing-ratio/) about gearing ratio. I got few questions:

  1. Why for normal company, gearing ratio formula can be both total borrowings/ total equity and total borrowings / total assets? while for REITs, gearing ratio formula is total borrowings/ total assets?
  2. How to calculate gearing ratio?
  • Finance cost/ operating CF before changes in working capital?
  • total borrowings/ total assets?
  • finance cost/ total assets?

Lastly, what is the difference between gearing ratio and debt-to-equity ratio?
 
Regards,
Thomas

3 Answers
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Victor Chng answered 5 years ago

Hi Thomas,
 
1.Normal companies should be using total borrowings/ total equity. total borrowings / total assets is only use for property company.
 
2.Our definition of gearing ratio is total borrowings/ total equity but if the company is a property company than you use total borrowings / total assets is only use for property company.
 
3. Gearing Ratio and debt to equity ratio is the same thing.
 

Thomas replied 5 years ago

Is there a reason for using total borrowings/total assets instead of the normal debt-to-equity on property companies?

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Thomas answered 5 years ago

Is there a reason for using total borrowings/total assets instead of the normal debt-to-equity on property companies?

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Victor Chng answered 5 years ago

Hi Thomas,
 
It is because property companies usually take loan for their properties hence the amount of loan are able to be taken based on the property value. Therefore, under the asset, that is where the property value can be found.