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Ratio

In: Business and Management

Submitted By jenni139300
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The most comprehensive form of gearing ratio is one where all forms of debt - long term, short term, and even overdrafts are expressed as a percentage of the total assets of the company.The calculation is as follows: * Long-term debt + Short-term debt + Bank overdrafts X 100
Shareholders' equity+Long-term debt + Short-term debt + Bank overdrafts
Sainsbury’s gearing ratio for 2013 was 55% compared to 67% for Tesco. This meet that out of every £1 of the assets of Sainbury, 55 pence is financed by debt compared to 67 pence for Tesco.
The interest cover ratio demonstrates the relationship between the amount of operating profit available to cover interest payable. More importantly it demonstrates the maximum number of times the operating profit can decrease to still cover the interest payable. The lower the interest cover, the greater the risk for creditors that they will not be paid and the greater the risk to shareholders that creditors will take action. Sainsbury’s levels of operating profit are much higher than the interest payable. This means that if the operating profit shrank 8.9 times, the interest payable would be still covered. The interest cover for Teco is 9.5 times which means that even if the profits must decreased by 9.5 times it will still be able to service its debt. We are assuming of course that the debt are at a fixed interest and is not subject to interest rate variation.
It seems that both company have a good gearing percentage and more importantly a high interest cover. We should not forget that in some cases voluntarily finance companies through debt to get tax benefit. (dividend payment is not deductible in calculation of tax liability while interest payment is deductible and thus reduce tax

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