Calculate gearing using the syllabus definition
Calculate fixed-cost capital as a percentage of total capital using the exact A Level denominator.
Section 3.5 · Analysis and communication of accounting information
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Use the ratio formulae in the syllabus appendix exactly; Cambridge states these are the only formulae accepted. Use year-end balances where appropriate unless the question specifies averages, and round to the requested number of decimal places. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the AS Topic 1.6 ratio, financial-statement and stakeholder skills. These lessons add only the A Level ratios and interpretation required by Topic 3.5.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
If non-current liabilities are $200,000 and total capital is $800,000, what is gearing?
What you will learn
- Use non-current liabilities as fixed-cost capital in the stated gearing formula
- Build total capital from shares, all reserves and non-current liabilities
- Interpret borrowing alongside coverage and risk
Use the fixed-cost-capital formula
Gearing (%) = fixed-cost capital ÷ total capital × 100. The syllabus gives the equivalent formula: non-current liabilities ÷ (issued ordinary share capital + all reserves + non-current liabilities) × 100.
Use all reserves and the stated non-current liabilities. Do not substitute debt/equity or another familiar gearing convention; Cambridge says candidates must use the appendix formulae. The result is a percentage of the defined total capital.
Interpret gearing with borrowing capacity
A higher percentage means a larger share of the defined capital comes from non-current liabilities. Fixed interest and repayment obligations can increase risk, especially when profit or cash flow weakens.
A lower ratio does not automatically mean the company is stronger; borrowing may fund productive investment, and equity funding can have costs too. Read it with interest cover, earnings, cash flow, loan terms and the purpose of finance.
Pause and explain
Why read gearing with interest cover?
Worked example
Non-current liabilities are $250,000, issued ordinary share capital is $400,000 and all reserves are $150,000. Calculate gearing.
Show the worked solution
- Total capital = $400,000 + $150,000 + $250,000 = $800,000.
- $250,000 ÷ $800,000 × 100 = 31.25%.
- The ratio is 31.25% using the syllabus definition.
Answer Gearing is 31.25%.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A company has non-current liabilities $300,000, issued ordinary shares $500,000 and reserves $200,000. Calculate gearing.
Give me a hint
Add all three capital components for the denominator.
Compare my reasoning
- Total capital = $300,000 + $500,000 + $200,000 = $1,000,000.
- $300,000 ÷ $1,000,000 × 100 = 30%.
- Check that reserves and non-current liabilities are both included once.
Gearing is 30%.
Look for these in your work
- Use non-current liabilities as numerator.
- Include shares, all reserves and liabilities in total capital.
- Express the result as a percentage.
A firm has non-current liabilities $420,000, issued shares $700,000 and reserves $280,000. Calculate gearing and state the amount of non-debt capital.
Give me a hint
Compute total capital before the percentage.
Compare my reasoning
- Total capital = $420,000 + $700,000 + $280,000 = $1,400,000.
- Gearing = $420,000 ÷ $1,400,000 × 100 = 30%.
- Non-debt capital in this formula is shares plus reserves: $980,000.
Gearing is 30%; issued shares and reserves total $980,000.
Look for these in your work
- Calculate total capital as $1.4 million.
- Calculate gearing as 30%.
- Distinguish non-debt capital from total capital.
A director argues that gearing of 55% is safe because the company has grown quickly. What evidence should an analyst check before agreeing?
Give me a hint
A growth claim does not show whether the company can meet interest or repayment obligations.
Compare my reasoning
- Check interest cover and operating cash flows against the amount and timing of interest and principal obligations.
- Review how borrowing funded the growth and whether returns are expected to exceed financing costs.
- Assess earnings stability, loan covenants, future rates and non-financial risks before making a recommendation.
Growth alone does not establish safety. Review cash flow, interest cover, repayment terms, returns on borrowing and the stability of future earnings.
Look for these in your work
- Check cash flow and debt-service obligations.
- Assess what the borrowing financed and its expected return.
- Use covenant and future-risk evidence.
Common mistakes
- Using equity alone as the denominator
- Omitting reserves or non-current liabilities from total capital
- Treating a lower percentage as proof that borrowing is always safer
What can you explain now?
Which denominator does the syllabus use for gearing?
Compare with the explanation
Issued ordinary share capital + all reserves + non-current liabilities
Use the stated total-capital denominator, not a different gearing convention.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Write both the gearing formula and the syllabus definition of total capital.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.