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.
