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Building on the profitability and liquidity ratios covered in the previous lesson, this lesson examines gearing and efficiency ratios. These ratios reveal how a business finances its operations and how effectively it manages key working capital components. Together, they give a more complete picture of financial health and strategic risk, as required by AQA specification topic 3.7.2.
Gearing Ratio = (Non-current Liabilities ÷ Capital Employed) × 100
Capital employed = Total equity + Non-current liabilities
Gearing measures the proportion of a business's long-term finance that comes from debt (non-current liabilities such as bank loans, debentures and bonds) rather than equity (shareholders' funds). It is a measure of financial risk.
| Company | Non-current Liabilities (£m) | Total Equity (£m) | Capital Employed (£m) | Gearing |
|---|---|---|---|---|
| Firm A | 20 | 80 | 100 | 20% |
| Firm B | 60 | 40 | 100 | 60% |
| Firm C | 85 | 15 | 100 | 85% |
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