Wednesday, 24 August 2011

Gearing Ratios

I did some research and realised that the generic term "gearing" that people use have different meanings.

For Reits: Gearing = Total Debt/Total Asset.
Using LMIR as example for FY2010, gearing = 125000 / 1212508 = 10.3% (ST debt of LMIR = 0)
(this is what you see in the presentation in LMIR.)
(For reits, this is usually the gearing which they talk about)

However, some people also use gearing as Total debt/Total Equity where Total debt = LT debt + ST debt
Using LMIR as example for FY2010, gearing = 125000 / 901909 = 13.7%

For Net gearing, which is more comprehensive in my opinion as it account the cash portion.
Net gearing = Net debt / Total equity where Net debt = LT debt + ST debt - cash & cash equivalents. This ratio include the liquid portion of the company, cash & cash equivalents.
Using LMIR as example for FY2010, net gearing = (125000 + 0 -109979) / 901909 =1.67%

Of course, there is also the famous debt to equity ratio. Debt to equity = LT debt/equity.

In summary, there are many gearing ratios available. Different gearing ratios should be use for different purposes. Always think of purpose first before using.

Next time, when other people talk about gearing, please remember to ask them which gearing they are talking about. 

2 comments:

Singapore Man Of Leisure said...

LOL!

You too? You should try asking personal networth...

Some people use the standard accounting formula for calculating a company's networth; but when it comes to personal networth, so many variations!

Some say cannot count the apartment/house we live in (investment property can - huh?), some say don't count CPF...

Hey! It's financial manipulation to make us feel better when benchmarking with others :)

OT83 said...

Hi SMOL,

Agree, these kind of ratios just serve as a reference for the things which one want to measure or benchmarking with others.

Like the example which you gave, personal networth. There are so many variations of it. But who cares? As long as the method which you used satisfied your need, its good enough.

It is never ending when you try to compare with others although some comparisions are good as it strive you to work harder.

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