The gearing ratio shows the proportion of the firm s capital that is borrowed, and so the higher the ratio the more vulnerable the firm may be. However, if a high gearing ratio is combined with a high interest cover ratio, this means that despite the high level of borrowing the firm can easily cover the interest payments from its profit. In this case looking at both ratios together has indicated a less exposed position than looking at just one. For the gearing ratio start from the highest figure first , but for the interest cover ratio start from the lowest figure first . Choose 5 companies from the same industry and write a full report for a potential investor about the firm s borrowing position.
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