Gross GearingGross Gearing ratio, is the Total Debt (short-term and long-term) as a percentage of the Total of Shareholders' funds and Debt funds. The calculation is the following:
= [(creditors,short + creditors,long + creditors,other + subordinated loans + insurance funds) / (ord cap,reserves + prefs,minorities + creditors,short + creditors,long + creditors,other + subordinated loans + insurance funds)] * 100
= [TOTAL LIABILITIES / TOTAL ASSETS] * 100
As currently, borrowing arrangements have become much more flexible, on certain cases companies tend to substitute Long-term loans with Short-term borrowings which they carry forward. This phenomenon is encountered in cases of stong expectations for lower interest rates in the economy. In such cases, a company might find preferable, instead of locking itself in a long-term obligation with an interest rate that might prove to be higher than the prevailing market rate in the near future, to use short-term debt as a part of its capital structure - and therefore take advantage of decreasing interest rates.
Therefore, Gearing ratios presented here incorporate into their calculation, not only Long-term Debt, but the total of Short-term and Long-term liabilities of a company.