Business – 10.2 Analysis of published accounts – Gearing ratio | e-Consult
10.2 Analysis of published accounts – Gearing ratio (1 questions)
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Answer 2:
- A gearing ratio of 120% means the company’s debt exceeds its equity (Debt ÷ Equity = 1.20).
- Financial risk: High reliance on borrowed funds increases vulnerability to interest rate rises and cash‑flow problems.
- Cost of capital: Lenders may demand higher interest rates, and equity investors may require a higher return to compensate for increased risk, raising the overall weighted average cost of capital (WACC).
- Potential consequences include tighter credit terms, reduced flexibility for future borrowing, and possible pressure on profitability if earnings do not cover interest obligations.