Capital Gearing Ratio - Explained in Hindi - YouTube

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Namaskar, my name is Mukul

And you are welcome to the Asset Yogi

In this video, we will discuss the capital gearing ratio.

This video is also a part of a series in which we are discussing solvency ratios.

First, we covered debt ratios.

Then we covered coverage ratios. You'll find the links in the description

You can watch them. When we talk about solvency then

we want to assess the financial risk of the company.

This means whether the company will remain solvent or not

If there are chances for its bankruptcy. Sometimes we also study

capital gearing ratios during this analysis.

What is the formula for this ratio? How is its calculation done?

How to interpret it? We will know this in this video

So keep watching the video till the end.

Let's go straight towards the blackboard.

So see, the capital gearing ratio is similar to the debt to equity ratio.

I will recap quickly what we saw in the debt to equity ratio.

In the debt to equity ratio,

you divide total debt by total equity.

So we will know that

how much debt a company has taken?

And how much is the debt as compared to equity?

We will know how high is the financial risk of the company.

We will know the financial risk of a company by capital gearing ratio.

Whether you will call it a financial risk

or call it a solvency risk.

A company will remain in the business or not

We will know that.

If a debt is high then the financial risk of the company increases.

So we will take an example

Assume, the share capital

of a company is

10 lakhs Rs

And reserves and surplus of the company are

1 crore 10 lakhs Rs.

15% of dividends are promised in preference shares.

The capital of preference shares is 10 lakhs.

The company has issued the debentures and bonds

12% returns are promised there.

The capital of 15 lakhs has been raised from the debentures or bonds.

A company has taken short-term debt and is paying 13% interest.

We will assume the debt is 25 lakhs. Long term debts according to 12%

interest rate is 50 lakhs. So when we'll calculate the debt-equity ratio

What will be equity here? We have to take total equity.

So these are your total equity.

I will write total equity here.

This is your total equity. And what will be your total debt?

Total debt is your debentures, short term, and long term bonds

You will take this as total debt

So in this way, you calculate your debt to equity ratio

Now, we will talk about

capital gearing ratio

The idea is somewhat different here.

We want to see that

how much are the fixed interest-bearing funds?

In the formula of capital gearing ratio, fixed interest-bearing funds

comes under numerator. Common shareholder's equity comes under the denominator

What are fixed interest-bearing funds? Wherever you've promised

returns. Pay attention to the fixed interest

You've promised interest on long term debt

Bank will take this much interest for sure.

Whether the company has income or not.

Here you have to give interest. This is a fixed interest-bearing fund.

You have to give interest in the short-term debt.

You've also promised interest of 12% on debentures and bonds

You will have to give this, whether the company earns a profit or not.

Now we will talk about preference shares. You may get confused

You've promised dividends of 15% on preference shares.

So it is also a fixed interest-bearing fund here.

Otherwise, it is a part of total equity but when we talk

about capital gearing ratio then it comes under the fixed interest-bearing fund.

And in share capital,

You don't have to give interest to the promoters

and you don't have to give any type of fixed returns

It is risk capital.

Reserves and surplus are also part of equity so you don't have to give fixed interest.

These two parts are common equity.

I will write it down here.

This is part of your common equity.

And how much is the common equity, we will add it.

It's 1 crore 20 lakhs.

I will write 1.20 crores here.

And all these funds are your fixed interest-bearing funds.

And when you'll add them

then your total value would be 1 crore.

Now we will calculate CGR, how much is the capital gearing ratio?

Your common equity is 1.2 crores

So it will go to the denominator. And your fixed interest-bearing funds

They are 1 crore. So they will go up. Now we will divide 1 by 1.2

Then the value of CGR would be 0.83 crores.

Now the question that arises when you've calculated the

capital gearing ratio is what is the meaning of 0.83?

Is it high or low?

How will we interpret it?

I will tell you some important points in the capital gearing ratio

If the capital gearing ratio is more than one

That means fixed interest-bearing funds are more

than the common shareholder's equity

If you've any financial crisis,

in that case, let's say

your revenue starts decreasing,

you don't earn any profits.

In this case, the bank will not provide you with a loan easily

If somebody gives then your interest rates will be higher.

Other than this,

if the company starts incurring losses

then the shareholder's equity

will start decreasing more.

In these cases, there are very high chances of bankruptcy

Now I am not saying that this will happen for sure.

We are talking if the revenue starts getting bad if the market gets bad

Then there are chances of bankruptcy. That's why if your CGR

is more than 1 then this is considered a high financial risk

by investors or along with that any banks or any financial lender

From 0.5 to 1, a company is considered highly geared.

If this ratio is from 0.5 to 1, then also it is considered high risk.

The banks will not sanction your loans easily.

And if we talk about a healthy ratio

then 0.25 to 0.5 can be considered as a healthy ratio

for stable and well-established companies.

The bank considers 0.25 to 0.5 for the stable companies.

And if we say the healthy ratio

or most optimal ratio

then your debt or the fixed interest gearing funds

should be less than 0.25

as compared to shareholders' equity.

That is considered a low risk

Any investor would want that a company shouldn't have very high debt or

high-interest bearing funds and even preferred stocks shouldn't be high

And with that, this ratio should be healthy.

Investors and lenders, both are concerned about the high debt-equity ratio

and capital gearing ratio.

This is mainly because if the company faces any tough time

The market gets worse or the situation of the company gets bad

Then the low geared companies whose CGR is less

If it is less than 0.25

Those companies will survive better

in these types of crises.

I hope you liked the video.

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Then you can do it in the comment section.

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