Financial ratios - Help Please

Apr 04, 2005 3 Replies
U

Hi all



As part of one of my assignments I am analysing the accounts of Paddy Power (Bookmaker)



One of the financial ratios that I am looking at is the Gearing Ratio. This figure is currently Zero, and I was wondering why they should have zero gearing ? (0.9 in 2001 & 2.51 in 2000) William Hill on the other hand have figures of 53.37, 65.35, and 95.44 for the periods 2003 -2001 respectively



Any suggestions which ratios would be most appropriate when performing financial ratio analysis on such a business ? I know that I cannot look at ratios regarding stock, as they don't hold any stock



Any suggestions most welcome



TIA


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W

It seems to me that capital stock must be involved in some way since the gearing ratio is calculated as Long Term Liabilities / Equity Shareholder's Funds. Am I reading something wrong? I am not in the UK, but found information about this ratio. Under the circumstances you give, the company must have preferred equity funding to debt funding in the time period when the gearing ratio was near zero.

Wayne Brasch, CPA, M. S. Taxation

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U

Hi Wayne

I am calculating the Gearing ratio as Debt / (Debt + Equity), bur the comapny does not have any declared debt at present

I was just wondering why they might have chosen to go for zero gearing, as there are benefits to gearing >0

Con

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W

It is good to some extent to use someone else's money in a venture, but at some point the debt must be repaid. That can cause cashflow problems within some businesses if not managed properly. The company you are looking at may want to use the owner's money to fund the company.

Wayne Brasch, CPA, M. S. Taxation

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