Capital Gearing Ratio: Capital gearing (or leverage) refers to the proportion between fixed interest or dividend bearing funds & non-fixed interest or dividend bearing funds in the total capacity employed in the business. The fixed interest or dividend bearing funds include the funds provided by the debenture holders & preference shareholders. Non-fixed interest or dividend bearing funds are the funds provided by the equity shareholders. The amount, therefore, includes the Equity Share Capital & other Reserves. A proper proportion between the two funds is necessary in order to keep the cost of capital at the minimum.

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The capital gearing ratio can be ascertained as follows:

 

Funds bearing fixed interest or fixed dividend

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Equity Shareholder’s Funds

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