Highest Percentage Net Gearing

Excessive gearing makes a company vulnerable during a liquidity crisis and also makes it very sensitive to changes in interest rates.The net gearing figure measures total borrowings (less cash) as a percentage of shareholders’ funds including intangibles. If intangibles were excluded there would be too many freakish figures in the tables.

The first column has been used for net gearing based on the last annual report and the second for gross gearing. The next four columns have been used for interest cover, dividend cover, the current ratio and PCF, all of which are particularly significant statistics for highly-leveraged companies. If interest and dividend cover is slim and the current ratio below 1.25, the company entry should be checked very thoroughly as, prima facie, the company has a problem.

Companies that are highly geared, even if they pass all the other tests, are likely to exaggerate market trends. Their shareholders’ funds are fully invested and further borrowings result in the company being more committed and therefore more subject to prevailing winds. In times of recovery, high gearing can be a massive advantage to shareholders, but the reverse is also the case in tougher times.

The last column has been used for ROCE as shown by the last annual report. This is again a key figure for a company borrowing a lot of money. If the ROCE is less than the cost of borrowing, the company clearly has a major problem.