Excessive
gearing makes a company vulnerable during a liquidity crisis
and also makes it very sensitive to changes in interest
rates.The net gearing figure measures total borrowings (less
cash) as a percentage of shareholders’ funds including
intangibles. If intangibles were excluded there would be
too many freakish figures in the tables.
The first column has been used for net gearing based on
the last annual report and the second for gross gearing.
The next four columns have been used for interest cover,
dividend cover, the current ratio and PCF, all of which
are particularly significant statistics for highly-leveraged
companies. If interest and dividend cover is slim and the
current ratio below 1.25, the company entry should be checked
very thoroughly as, prima facie, the company has a problem.
Companies that are highly geared, even if they pass all
the other tests, are likely to exaggerate market trends.
Their shareholders’ funds are fully invested and further
borrowings result in the company being more committed and
therefore more subject to prevailing winds. In times of
recovery, high gearing can be a massive advantage to shareholders,
but the reverse is also the case in tougher times.
The last column has been used for ROCE as shown by the last
annual report. This is again a key figure for a company
borrowing a lot of money. If the ROCE is less than the cost
of borrowing, the company clearly has a major problem.
