Creditors Turnover Ratio and its Formula/Calculation

Creditors Turnover Ratio shows the relationship between the net credit purchases and the average creditors. This ratio is expressed as a rate.

Purpose:

Purpose of this ratio is to

1) Calculate the speed with which creditors are paid off on an average during the year.

2) Calculate the creditors' velocity to indicate the period taken by the average creditors to be paid off.

3) Judge how efficiently the creditors are managed.

Formula:

Components:

1) Credit purchases means gross credit purchases minus purchases returns.

2) Average creditors mean average of opening and closing amount of creditors. If details are not given then only closing creditors may be considered as average creditors.

3) Amount of bills payable.

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Debt service coverage ratio and its Formula/Calculation

Debt service coverage ratio shows the relationship between net profit and interest plus loan instalments payable. This ratio is expressed in pure number.

Purpose:

Purpose of this ratio is to measure the debt servicing capacity of the company.

Formula:

Components:

1) Profit before interest & tax means net profit before payment of interest on loan and tax.

2) Interest means interest on long-term loans.

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Debt service Ratio and its Formula/Calculation

Debt service ratio shows the relationship between net profit and interest payable on loans. This ratio is also called as interest coverage ratio. This ratio is expressed as a pure number.

Purpose:

1) Purpose of this ratio is to measure the interest paying capacity of the company.

2) The purpose of this ratio is to find out the number of times the fixed financial charges are covered by income before interest and tax.

Significance:

1) It is important from the lenders' point of view.

2) It indicated whether the company will earn sufficient profits to pay periodical interest charges.

3) It shows that the company will be able is pay interest regularly.

Formula:

Components:

1) Profit before interest & tax means net profit before payment of interest on loan and tax.

2) Interest means interest on long-term loans.

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Price earnings ratio (P/E Ratio) and its Formula/Calculation

Price earnings ratio (P/E Ratio) measures relationship between market price of equity shares and earnings per share. It is usually expressed as a fraction.

Purpose:

1) Purpose of this ratio is to show the effect of the earning on the market price of the share.

2) It helps the investors while deciding whether to purchase, keep or sell the equity shares.

3) It helps to ascertain the value of equity share.

Formula:

Components:

1) Market price per equity share = quoted price of a listed equity share.

2) Earnings per equity share refer to formula given above.

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Dividend payout ratio and its Formula/Calculation

Dividend payout ratio shows relationship between dividend paid to equity shareholders out of profit available to the equity shareholders.

Purpose:

Purpose of this ratio is to measure the dividend paying capacity of the company.

Significance:

1) Higher ratio signifies that the company has utilized the larger portion of its earning for payment of dividend to equity shareholders.

2) It says lesser amount of earning has been retained.

Formula:

Components:

1) Dividend per equity shares means total dividend paid to equity shareholder dividend by number of equity shares.

2) Earning per shares refer to formula given above

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Earning per share and its Formula/Calculation

Earning per share is calculated to find out overall profitability of the organization. It represents earnings of the company whether or not dividends are declared. Earning per share is determined by dividing net profit by the number of equity shares.

Purpose:

Purpose of this ratio is to calculate the amount of profit available on each equity shares to take care of equity dividend, transfer to reserve, etc.

Significance:

1) This ratio helps the investors or shareholders to take decision while purchasing or selling shares.

2) This ratio shows the possibilities of issue of bonus shares.

3) Higher ratio indicates overall profitability.

Formula:

Components:

1) Net profit after tax & interest - less preference dividend.

2) No. of equity shares.

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Return on equity share capital and its Formula/Calculation

This ratio explains relationship between net profit (after tax and interest and dividend on preference share) and equity share holders' funds. This ratio is expressed in percentage.

Purpose:

Purpose of this ratio is to calculate amount of profit available to take care of equity dividend, transfer to reserves, etc.

Significance:

1) It is useful to the investors while deciding whether to purchase or sale of shares.

2) This ratio helps to make comparative study of equity capital with other company and it will be appreciate if there is high return.

Formula:

Alternatively this ratio may be calculated by using following formula for calculating the return per equity shares.

Components:

1)Net profit after tax & interest and preference dividend.

2)Equity share capital by adding reserves or deducting miscellaneous expenditures.

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Return on Proprietors Funds and its Formula/Calculation

This ratio measures the relationship between net profit after tax & interest and proprietors fund. This ratio is alternatively known as "Return on proprietors' equity" or "Return on shareholders' investment" or "Investors' ratio". This ratio is expressed in percentage. Purpose of this ratio is to measure the rate of return on the total fund made available by the owners. This ratio helps to judge how efficient the concern is in managing owners' funds at its disposal. This ratio is very significant to prospective investors and shareholders. With the help of this ratio company can decide to rise finance from external sources even from public deposit it ratio is satisfactory. Shareholders can expect to capitalize its reserves and issue bonus shares when ratio is higher for reasonable period of time.

Formula:

Components:

1) Net profit after tax and interest

2) Proprietors' funds

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Debtors' Turnover Ratio and its Formula/Calculation

Debtors' Turnover Ratio shows the relationship between credit sales and average trade debtors. Alternatively, this ratio is known as "accounts receivable turnover ratio" or "turnover of debtors' ratio". This ratio is expressed as a rate.

Purpose:

Purpose of this ratio is to.

1) Calculate the speed with which debtors get settled on an average during the year.

2) Calculate debtors' velocity to indicate the period of credit allowed to average debtors.

3) Judge how efficiently the debtors are managed.

Formula:

Components:

1) Sundry debtors

2) Accounts receivables I.e. bills receivables.

3) Average daily sales.

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Stock Turnover Ratio and its Formula/Calculation

Stock turnover ratio shows relationship between costs of goods sold and average stock. This ratio is also known as "Inventory Ratio" or "Inventory Turnover Ratio" or "Stock Turn Ratio" or "Stock Velocity Ratio" or "Velocity of Ratio". This ratio measures the number of times of stock turns or flows or rotates in an accounting period compared to the sales affected during that period. This ratio indicated the frequency of inventory replacement. This ratio is expressed as rate. Purpose of stock turnover ratio is to calculate the speed at which the stock is being turned over into sales. Calculate the stock velocity to indicate the period takes by average stock to be sold out. Judge how efficiently the stock are managed and utilized to generate sales.

Formula:

Components:

1)

2)

* If opening stock is not given, the closing stock is treated as average stock.

Alternative method of stock turnover ratio:

This ratio can be calculated by using average stock at selling price at as the denominator. Under this method, average Stock at selling price is related to net sales.

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Net operating profit ratio and its Formula/Calculation

Operating profit ratio indicates the relationship between operating profit and net sales. This ratio is expressed in percentage. It signifies higher operating efficiency of management and control over operating cost. It indicates profitability of various operations of the organization I.e. buy, manufacture, sales, etc. It shows the ability of an organization to generate operating profit out of its daily operations.

Formula:

Components:

1) Net operating profit is equal to gross profit minus all operating expenses or sales minus cost of goods sold and operating expenses.

2) Net sales are equal to sales minus sales returns.

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Net profit Ratio and its Formula/Calculation

Net profit ratio indicates the relationship between net profit and net sales. Net profit can be either operating net profit or net profit after tax or net profit before tax. Alternatively, this ratio is also known as “Margin on sales ratio". Normally this ratio is calculated & expressed in Percentage. It measures overall profitability of the business. It is very useful in judging return on investments. It provides useful inferences as to the efficiency and profitability of the business. It indicates the portion of net sales is available for proprietors. It is a clear index of cost control, managerial efficiency, sales promotion, etc..

Formula:

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Return on capital employed and its Formula/Calculation

This ratio explains the relationship between total profit earned by business and total investment made or total assets employed. It is expressed in percentage. This ratio is also known as "Return on Investment", or "Return on Total Resources". Purpose of this ratio is to measure overall profitability from the total funds made available by owners and leaders. To judge how efficient the business concern is in managing the funds at its disposal. This ratio is effective tools to measure overall managerial efficiency of business. Comparison of this ratio with other company and this information can be obtained for determining future course of action. This ratio indicates the productivity of capital employed and measures the operating efficiency of the business.

Formula:

Components:

1) Net profit before tax, interest & dividends (PBIT)

2) Capital employed calculation:

Capital employed =

I) Equity share capital

ii) Add. Preference share capital reserve & surplus

iii) Add. Long term borrowings (Term loan + Debentures)

iv) Less: Fictitious assets like miscellaneous expenses not written off.

v) Less profit & loss A/c Dr. Balance (loss)

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Expenses Ratio and its Formula/Calculation

Expenses ratio explains relationship of items or group of expense to net sales. Such ratios are collectively known as expanses ratio. This is calculated and expressed in percentage. This Ratio expresses the percentage of items of expenses with net sales. This ratio helps us to know the cause behind overall changes in operating ratio. Purpose of this ratio is to take corrective action. It indicates the efficiency of management in control led expenses and improving profitability. This ratio enables the income tax department to judge the correctness and reliability of income disclosed in income tax returns. Analytical study of this ratio can be judged by trend of expenses. Comparative study of year to year expenses can be possible.

Formula:

1.

2.

3.

4.

5.

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Operating Ratio and its Formula/Calculation

Operating ratio studies the relationship between the cost of activities and net sales I.e. cost of goods sold and net sales. This ratio shows the percentage of the cost of goods sold with net sales. This ratio is expressed in percentage. Purpose of operating ratio is to ascertain the efficiency of the management regarding the operation of the business concern. It is used to test the operational efficiency of the business. This ratio is the yardstick which measures the efficiency of all operational activities of business I.e. production, management, administration, sales, etc.

Formula:

Limitation of operating ratio:

1) It cannot test the profitability of business without considering extraordinary items.

2) The utility of operating ratio is limited owing to its vulnerability to changes in management decisions.

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Gross profit ratio And It’s Formula/Calculation

Gross profit ratios express the relationship between gross profit and net sales. This ratio is also known as "Turnover ratio" OR "Margin ratio" OR "Gross margin ratio" OR "Rate of gross profit". This ratio is expressed in percentage of net sales. This ratio says about %age gross profit to net sales. This ratio analyses the basic profitability of business. It shows the degree to which the selling price per unit may decline without resulting in loss from operations. Yearly comparisons of gross profit ratio reveal the trend of trading results.

Formula:

Gross Profit Ratio= (Gross Profit/Sales)*100

Components of this ratio are

1) Net sales = Total sales less sales return
2) Gross profit = Sales - Cost of sales
3) Cost of sales = (opening stock + purchases + direct labour + other direct charge) - closing stock

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Debt Equity Ratio And It’s Formula/Calculation

Debt Equity ratio express the relationship between external equities and external equities I.e. owners' capital and borrowed capital. It shares favourable or non favourable capital structure of the company. It shows long term capital structure. It reveals high margin of safety to creditors and makes us understand the dependence on long term debts. Standard debt equity ratio is 2:1, which means debts should be double the shareholders funds.

Formula

Debt equity Ratio=Debt/Equity

                                          0r

                                 Long Term Debts/Shareholders Fund

                                               or

                                  Long Term Debts/(Shareholders' Funds + Long Term Debts)

Components:

1) Debts include all liabilities including short term & long term I.e. mortgage loan and debentures.
2) Shareholders’ funds consist of preference share capital, Equity share capital, Capital and Revenue Reserves, Surplus, etc..

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What are the different types of issues in Primary capital Market?

There are different ways for offering new issues in the primary capital market. Primary issues made by Indian Companies can be classified as follows:

a. Public Issue
This is one of the important and commonly used methods for issuing new issues in the primary capital market. When an existing company offers its shares in the primary market, it is called public issue. It involves direct sale of securities to the public for a fixed price. In this kind of issue, securities are offered to the new investors for becoming part of shareholders’ family of the issuer. If everybody can subscribe to the securities issued by a company, such an issue is termed as a public issue. In terms of the Companies Act of 1956, an issue becomes public if it is allotted to more than 50 persons. SEBI defined public issue as “an invitation by a company to public to subscribe to the securities offered through a prospectus.” Public issue can be further classified into two:

I). Initial Public Offer (IPO)
An IPO is referred simply an offering or flotation of issue of shares to the public for the first time. Initial Public Offer is the selling of securities to the public in the primary market. When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an Initial Public Offer (IPO).
The sale of securities can either be through book building or through normal public issue. IPOs are made by companies going through a transitory growth period or by privately owned companies looking to become publicly traded. IPO paves the way for listing and trading of the issuer’s securities in the stock exchanges. Initial Public Offering can be a risky investment. For the individual investor, it is tough to predict the value of the shares on its initial day of trading and in the near future since there is often little historical data with which to analyse the company.

ii). Further Public Offer (FPO)
When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public it is called FPO is otherwise called as Follow on Offer.

iii). DIFFERENCES BETWEEN IPO AND FPO
Often Initial Public Offer (IPO) and Further Public Offer (FPO) are used interchangeably. When the company offers its shares to the investors for the first time it is called initial public offering (IPO). At the time of IPO the companies’ shares are not listed on any stock exchange. When an existing company subsequently issue more new shares in the primary market, it is called Further Public Issue (FPO) and is not considered to be an IPO.

b. Rights Issue
When a listed company which proposes to issue fresh securities to its existing shareholders existing as on a particular dated fixed by the issuer (I.e. record date), it is called as right issue. The rights are offered in a particular ration to the number of securities held as on the record date. The route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.

c. Bonus Issue
When an issuer makes an issue of shares to its existing shareholders as on a record date, without any consideration from them, it is called a bonus issue. The shares are issued to the existing shareholders out of company’s free reserves or share premium account in a particular ratio to the number of securities held on a record date.

d. Private Placement
When a company offers its shares to t select group of persons not exceeding 49, and which is neither a rights issue nor a public issue, it is called a private placement. Often a combination of public issue and private placement can be used by the companies for the issue of securities in the primary market. Privately placed securities are often not publicly tradable and may only be bought and sold by sophisticated qualified investors. As a result, the secondary market is not liquid as in the case of a private issue. There are SEBI guidelines, which regulate the private placement of securities by a company. Private placement is the fastest way for a company to raise equity capital. Private placement can be of two types viz., preferential allotment and qualified institutional placement.

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Who are the parties involved in Capital Market?

Capital Market is a market for long-term funds. It requires a well-structured market to enhance the financial capability of the country. The market consists of a number of players. They are categorised as:

1. Companies
Generally every public company can access the capital market. The companies which are in need of finance for their projects can approach the market. The capital market provides funds from the savers of the community. The companies can mobilise the resources for their long-term needs such as project cost, expansion and diversification of projects and other expenditure items. In India, the companies should get the prior permission from the SEBI (Securities Exchange Board of India) to raise the capital from the market. The SEBI is the most powerful organisation to monitor, control and guide the capital market. It classifies the companies for the issue of share capital as new companies, existing, and unlisted existing listed companies.

According to its guidelines a company is a new company, if it satisfies all the following conditions:

a. The company shall not have completed 12 months of commercial operations.
b. Its audited operative results are not available.
c. The company may set-up by entrepreneurs with or without track record.

A company can be treated as existing listed company, if its shares are listed in any recognised stock exchange in India. A company is said to be an existing listed company if it is a closely held or private company.

2. Financial Intermediaries
Financial intermediaries are those who assist in the process of converting savings into capital formation in the country. A strong capital formation process is the oxygen to the corporate sector. Therefore, the intermediaries occupy a dominant role in the capital formation which ultimately leads to the growth of prospering to the community. Their role in this situation cannot be neglected. The government should encourage these intermediaries to build a strong financial empire for the country. They can also be called as
financial architectures of the Indian digital economy. Their network cannot be ignored. Their financial capability cannot be measured. They take active role in the capital market. The major intermediaries in the capital market are:

a. Brokers
b. Stock-brokers and sub-brokers
c. Merchant Bankers
d. Underwriters
e. Registrars
f. Mutual Funds
g. Collecting agents
h. Depositories
I. Agents
j. Advertising agencies

3. Investors
The capital market consists of many number of investors. All types of investor's basic objectives are to get good returns on their investment. Investment means, just parking one's idle fund in a right parking place for a stipulated period of time. Every parked vehicle shall be taken away by its owners from parking place after a specific period. The same process may be applicable to the investment. Every fund owner may desire to take away the fund after a specific period. Therefore, safety is the most important factor while considering the investment proposal. The investors comprise the financial and investment companies and the general public companies. Usually, the individual savers are also treated as investors. Return is the reward to the investors. Risk is the punishment to the investors who wrongly made investment decision. Return is always chased by the risk. An intelligent investor must always try to escape the risk and capture the return. All rational investors prefer return, but most investors are risk averse. They attempt to get maximum capital gain. The return can be made available to the investors in two types and they are in the form of revenue or capital appreciation. Some investors will prefer for revenue receipt and others prefer capital appreciation. It depends upon their economic status and the effect of tax implications. The institutions and companies raise the resources from the market by designing various schemes to meet the needs and convenience of the investors. They schemes can be framed to attract all types of investors, who are selling in the capital market. The main objective of any type of investor are safety, profitability, liquidity and capital appreciation.

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Functions and Significance of a Capital Market

Capital market plays a vital role in the development by mobilising the savings to the needy corporate sector. In recent years there has been a substantial growth in the Capital Market. The Capital Market involves in various functions and significance. They are presented below:

Coordinator
The Capital Market functions as coordinator between savers and investors. It mobilises the savings from those who have surplus fund and divert them to the needy persons or organisations. Therefore, it acts as a facilitator of the financial resource. In this way it plays a vital role in transferring the surplus resources to deficit sectors. It increases the productivity of the industry which ultimately reflects in GDP and national income of the country. It increases the prosperity of the nation.

Motivation of Savings
The Capital Market provides a wide range of financial instruments at all times. India has a vast number of individual savers and the crores of rupees are available with them. These resources can be attracted by the capital market with nature. The banks and non-banking financial institutions motivate the people to save more and more. In less developed countries, there is no efficient capital market to tap the savings. In underdeveloped countries there are very little savings due to various factors. In those countries they invest mostly in unproductive sector.

Transformation of Investment

The Capital Market is a place where the savings are mobilised from various sources, is at the disposal of businessmen and the government. It facilitates lending to the corporate sector and the government. It diverts the savings amount towards capital formation of the corporate sector. It creates assets by helping the industry. Thus, it enhances the productivity and leads to industrialisation. The industrial development of the country depends upon the dynamic nature of the capital market. It also provides facilities through banks and non-banking financial institutions. The development of financial institutions made the way easy to capital market. The capital has become more mobile. The interest rate fall lead to an increase in the investment.

Enhances economic growth
The development of the Capital Market is influenced by many factors like the level of savings with the public, per capita income, purchasing capacity, and the general condition of the economy. The capital market smoothens and accelerates the process of economic growth. The Capital Market consists of various institutions like banking and non-banking financial institutions. It allocates the resources very cautiously in accordance with the development of needs of the country. The balanced and proper allocation of the financial resources leads to the expansion of the industrial sector. Therefore, it promotes the balances regional development. All regions should be developed in the country.

Stability
The Capital Market provides a stable security prices in the stock market. It tends to stabilise the value of stocks and securities. It reduces the fluctuations in the prices to the minimum level. The process of stabilisation is facilitated by providing funds to the borrowers at a lower interest rate. The speculative prices in the stock market can be reduced by supply of funds. The flow of funds towards secondary market reduces the prices at certain level. Therefore, the Capital Market provides funds to the stock market at a low rate of interest.

Advantages to the Investors
The investors who have surplus funds can invest in long-term financial instruments. In Capital Market, a number of long-term financial instruments are available to the investor at any time. Hence, the investors can lend their money in the Capital Market at reasonable rate of interest. The Capital Market helps the investors in many ways. It is the coordinator to bring the buyer and seller at one place and ensure the marketability of investments. The stock market prices are published in newspapers everyday which enables the investor to keep track of their investments and channelize them into most profitable way. The Capital Market safeguards the interest of the investors by compensating from the stock exchange compensating fund in case of fraud and default.

Barometer
The development of the Capital Market is the indicator of the development of a nation. The prosperity and wealth of a nation depends, upon the dynamic capital market. It not only reflects the general condition of the economy but also smoothens and accelerates the process of economic growth. It consists a number of institutions, allocates the resources rationally in accordance with the development needs of the country. A good allocation of resources leads to expansion of trade and industry. It helps both public and private sector.

Generally, the corporate sector requires funds not only for meeting their long-term requirements of funds for their new projects modernisation, expansion and diversification programmes but also for covering their operational needs. Therefore, their requirement of capital is classified as given below:
a. Long-term capital
b. Short-term capital
c. Venture capital
d. Export capital

Long-term capital represents the amount of capital invested in the form of fixed assets. Fixed assets are such as land, building, plant and machinery necessary for every company at the initial stage of the commencement of the production. Heavy amount of capital is required by the companies when they are going for modernisation or expansion or diversification. Therefore, the requirement of long-term capital is supplied by the capital market. This is also referred to as Fixed Capital. Usually the corporate sector mobilises the fixed capital from the Capital Market through various long-term maturity financial instruments. Therefore, it provides adequate funds to the corporate sector by offering various financial instruments. They mobilise the funds through issue of Equity shares. Preference shares, debentures, bonds etc. These financial instruments have a longer maturity period and they are treated by the companies as permanent capital. Some instruments have no maturity until the close down of a business unit.

Short-term capital represents the amount of capital invested in current assets. The Current Assets consist of cash, bank balances, inventory, debtors etc. The short-term capital is required to meet the need of working capital of the corporate sector. Working capital is required for meeting the operating cost of the business concern. They are required to pay different amounts to different parties as per their schedule. Hence, they procure the working capital from the commercial banks. In India a majority of the corporate sector is funded by the banks through different modes of finance. The working capital is known as circulating capital. An adequate supply of working capital leads to smooth functioning of production of goods. There are some other avenues available to the corporate sector to meet the needs of the working capital.

Venture capital is the capital which invested in highly risky ventures. It is also known as seed capital. It is a quite recent entrant in the capital market. It has great significance in helping technocrat entrepreneurs at the commencement stage of the concern. It has technical expertise. But it lacks finance.

Export capital refers for making payment in International Trade. The payment of international trade involves in bills of exchange and other instruments.

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Why Capital market is important?

Capital market plays a vital role in a country’s economy. Capital market deals with long-term funds. These funds are subject to uncertainty and risk. It supplies long and medium term funds to the corporate sector. It provides the mechanism for facilitating capital fund transactions. It deals in ordinary shares, bond debentures and stocks and securities of the government. In this market the funds flow will come from savers. It converts financial assets into productive physical assets. It provides incentives to savers in the form of interest or dividend to the investors. It leads to capital formation.

The following factors play an important role in the growth of the capital market:
1. A strong and powerful Central Government
2. Financial dynamics
3. Speedy industrialisation
4. Attracting Foreign Investment

6. Speedy Implementation of policies
7. Regulatory changes
8. Globalisation
9. The level of savings and investment pattern of the household sectors
10. Development of financial theories
11. Sophisticated technological advances

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What is DuPont analysis? Formula and practice

The DuPont Corporation developed this analysis in the 1920s. The name has stuck with it ever since. The DuPont analysis is also called the DuPont model. It is a financial ratio based on the return on equity ratio that is used to analyse a company's ability to increase its return on equity. In other words, this model breaks down the return on equity ratio to explain how companies can increase their return for investors. The DuPont analysis looks at three main components of the ROE ratio.

1. Profit Margin

2. Total Asset Turnover

3. Financial Leverage

Based on these three performances measures the model concludes that a company can raise its ROE by maintaining a high-profit margin, increasing asset turnover, or leveraging assets more effectively.

Formula

The DuPont Model equates ROE to profit margin, asset turnover, and financial leverage. The basic formula looks like this.

Return on Equity = Profit Margin x Total Asset Turnover x Financial Leverage

Since each one of these factors is a calculation in and of itself, a more explanatory formula for this analysis looks like this.

Every one of these accounts can easily be found in the financial statements. Net income and sales appear on the income statement, while total assets and total equity appear on the balance sheet.

Analysis

This model was developed to analyse ROE and the effects different business performance measures have on this ratio. So investors are not looking for large or small output numbers from this model. Instead, they are looking to analyse what is causing the current ROE. For instance, if investors are unsatisfied with a low ROE, the management can use this formula to pinpoint the problem area whether it is a lower profit margin, asset turnover, or poor financial leveraging.

Once the problem area is found, management can attempt to correct it or address it with shareholders. Some normal operations lower ROE naturally and are not a reason for investors to be alarmed. For instance, accelerated depreciation artificially lowers ROE in the beginning periods. This paper entry can be pointed out with the analysis and shouldn't sway an investor's opinion of the company.

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Capital Gearing Ratio And It’s Formula/Calculation

Capital Gearing ratio brings out the relationship between capital carrying fixed rate of interest or fixed dividend and capital that doesn't carry fixed rate of interest or fixed dividend. This ratio indicates degree to which capital has been geared in the capital structure of the company. Alternatively this ratio is also known as "Leverage ratio" or "Financial leverage ratio" or " Capital structure ratio". This ratio is used to understand the effective capital structure of the company. It is mechanism to ascertain the extent to which the company is practicing trade or equity. It brings one balanced capital structure.

Formula:
Capital Gearing Ratio=Capital bearing Fixed Interest or dividend/ Capital not bearing Fixed Interest or dividend 

Components:
1) Capital bearing fixed interest or dividend comprises of debentures, secured an d unsecured loans, and preference share capital.
2) Capital not bearing fixed interest or dividend is equity share capital and reserve & surplus. This ratio also can be expressed in %age by multiplying this ratio by 100.