A company has long-term loans of KSh 250,000 and shareholders' equity of KSh 1,000,000. What is the gearing ratio (debt as a percentage of debt plus equity)?
Answer and explanation
Correct answer: C. 20%
- Step 1: Capital employed = debt + equity = 250,000 + 1,000,000 = 1,250,000. Step 2. Gearing = 250,000 / 1,250,000 x 100 = 20%. Answer: 20%. Why not the others: 25%: That divides debt by equity alone. 80%: That is equity as a percentage of capital employed. 500%: That turns the ratio upside down.
Practise more Interpretation of accounts.
Free questions with an explanation for every one, and full timed KASNEB CPA Foundation Level (Kenya) mock tests.
More Interpretation of accounts questions
- Trade receivables are KSh 120,000 and annual credit sales KSh 1,460,000. What is the receivables collection period in days (365 days a year)…
- Trade receivables are KSh 200,000 and annual credit sales KSh 2,190,000. What is the receivables collection period in days (365 days a year)…
- Trade receivables are KSh 90,000 and annual credit sales KSh 1,095,000. What is the receivables collection period in days (365 days a year)?
- Trade receivables are KSh 150,000 and annual credit sales KSh 1,825,000. What is the receivables collection period in days (365 days a year)…
- A company's profit before interest and tax is KSh 240,000 and its capital employed is KSh 1,200,000. What is the return on capital employed?
- A company's profit before interest and tax is KSh 450,000 and its capital employed is KSh 1,500,000. What is the return on capital employed?