REFS is
a mine of invaluable information for the private investor.
Selecting shares without its help is like trying to
clap with one hand tied behind your back.
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GEAR
(Net gearing)
Net gearing
indicates overall indebtedness, and is measured relative to
shareholders’ funds at the last reported financial year-end,
as disclosed in the latest available annual report. It is calculated
by dividing net borrowings, i.e. gross borrowings less cash
and near-cash assets, by shareholders’ funds, and expressing
the result as a percentage. For these calculations, shareholders’
funds include intangibles, and any preference capital redeemable
within 12 months is classed as borrowings.
Near-cash
assets:
Near-cash
assets are defined as current assets of a liquid nature, namely
those which can readily be converted into cash. Examples include
cash on overnight or short term deposit, treasury bills or CD’s
(Certificates of Deposit). Price sensitive items, such as marketable
securities, are not included in near-cash assets.
Shareholders’
funds:
These are
defined as follows:
ORDINARY
SHARE CAPITAL
+ PREFERENCE
SHARE CAPITAL
+ RESERVES
= SHAREHOLDERS’
FUNDS
Gearing
calculation:
TOTAL BORROWINGS,
LESS CASH &
NEAR CASH
ASSETS
---------------------------------------
X 100 = NET GEARING (%)
SHAREHOLDERS'
FUNDS
(NOTE:
A minus sign indicates nil net gearing and denotes an overall
net cash position.)
Calibrating
the gearing ‘moons’:
In certain
extreme circumstances, such as when shareholders’ funds are
negative while borrowings are nil, the gearing percentage alone
does not provide an adequate ranking basis to calibrate the
‘moons’. In order to provide a ranking basis which can encompass
all extremes, the gearing calculation is modified, for ranking
purposes only. Thus the ranking is based on the percentage of
borrowings, net of cash, to capital employed, i.e. shareholders’
funds plus total gross borrowings.
The result
gives a theoretical range of -100% (e.g. shareholders’ funds
fully invested as cash) to +100% (e.g. negative shareholders’
funds, with borrowings and no cash). This, in turn, enables
all companies to be ranked in the correct order for calibrating
the ‘moons’.
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