12 October 2013

Learning About Gearing Ratio

If you surf the internet while researching on your favourite stocks, no doubt you will eventually come across this term "Gearing Ratio", so what is it? Basically this tells people how much the company is borrowing to fund its business, too high means the company is at risk because it is over-leveraging, one good example is Lehman Brothers, before their collapse, they were owing way more than they were owning, so when they went bankrupt, there was nothing left to give back to shareholders, a lot of people lost their life savings.

In the first place if they didn't over-leverage so much, they probably wouldn't have collapsed. If you do a Google search on "lehman brother over-leverage", sources say they leverage from 30-35 to 1, that means for every $1 they own, they owe $30 to $35.

There are also a few ways to calculate a company's gearing ratio, but let's look at the Debt-to-Equity Ratio, where Equity means Shareholder's Equity. We will use the Total Debt and Long-Term Debt ratios.

You may also be thinking how high is too high, this you will need to compare with different companies in the same industry, the lowest in the industry would be the low point, the highest in the industry would be the high point. Following I'm comparing REITs of different industries, later on you may want to try to compare maybe purely for Industrial, or purely Retail.

Lippo Malls Indonesia Retails Trust (2013 Second Quarter Results) - Retail

Total Debt / Equity = 462,875 / 1,245,720 = 0.37

For every S$1 of equity, they have S$0.37 debt.

Long-Term Debt / Equity  = 318,371 / 1,245,720 = 0.25

For every S$1 of equity, they have S$0.25 long-term debt.

Equity is found at Unitholders' funds at page 4.
Total Debt is found at Total borrowings at page 4.
Long-Term Debt is found at Total unsecured borrowings at page 4.

CDL Hospitality Trusts (2013 Second Quarter Results) - Hotel

Total Debt / Equity = 676,094 / 1,555,751 = 0.43

For every S$1 of equity, they have S$0.43 debt.

Long-Term Debt / Equity  = 383,725 / 1,555,751 = 0.24

For every S$1 of equity, they have S$0.24 long-term debt.

Equity is found at Unitholders' funds at page 10.
Total Debt is found at Total borrowings at page 12.
Long-Term Debt is found at Amount repayable after one year at page 12.

Cambridge Industrial Trust (2013 Second Quarter Results) - Industrial

Total Debt / Equity = 472,543 / 824,390 = 0.57

For every S$1 of equity, they have S$0.57 debt.

Long-Term Debt / Equity  = (117,165 + 49,590) / 824,390 = 0.20

For every S$1 of equity, they have S$0.20 long-term debt.

Equity is found at Unitholders' funds at page 12.
Total Debt is found at Total borrowings at page 15.
Long-Term Debt is found at Amount repayable after one year for secured and unsecured at page 15.

Obviously these 3 companies are much less risky compared to Lehman Brothers.

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