**Capital Gearing Ratio**is a kind of solvency ratio that determines the ratio of fixed return capital to ordinary return capital/share capital.

$$Capital\quad Gearing\quad Ratio=$$$$\frac { Fixed\quad Interest\quad Funds }{ Common\quad Shareholder’s\quad Equity }$$

**Where,**

**Fixed Interest Funds**include Preference Shares, Bonds, and Debts (Current as well as Long Term) that include a fixed rate of interest.- And
**Common Shareholder’s Equity**includes Share Capital, Reserves and Surplus, Money received against Shares and Warrants that do not have any fixed rate of interest.

## Significance and Interpretation

**Capital Gearing Ratio = 1:**This implies that the Common Shareholder’s Equity is just equal to the Fixed Interest Funds which is an alarming and high-risk situation for a company. The total outgo in the form of fixed interest will be high.**Capital Gearing Ratio < 1:**The company will be considered safe if the Capital Gearing Ratio will be less than 1, as less the Capital Gearing Ratio more stable and solvent the company is.**Capital Gearing Ratio > 1:**The company is categorized as a high-risk company and on the verge of being insolvent. Creditors do not want to invest in a company with High Capital Gearing Ratio.- The
**ideal Capital Gearing Ratio is less than 0.25,**however, values up to 0.50 can be considered safe. However, it must be noted that this limit may shift depending upon the regulatory reforms and/or type of business.

### Examples

####
**Example 1: **

**Consider the following details of M/S ABC ltd. and find out its Capital Gearing Ratio.**

Particulars | Amount (in ₹ Cr) |
---|---|

Share Capital | 1500.00 |

Reserves and Surplus | 300.00 |

Preference Shares @10% | 250.00 |

Bonds @8% | 300.00 |

Short Term Debt @12% | 250.00 |

Long term Debt @10% | 220.00 |

####
**Solution:**

**Fixed Interest Funds =**Preference Shares + Bonds + Short Term Debt + Long Term Debt

**⇨**(250 + 300 + 250 + 220)

**⇨**₹ 1020.00 Crores

**Common Shareholder’s Equity =**Share Capital + Reserves and Surplus

**⇨**(1500 + 300)

**⇨**₹1800 Crores

**Capital Gearing Ratio =**Fixed Interest Funds / Common Shareholder’s Equity

**⇨**1020/1800

**Hence, Capital Gearing Ratio = 17/30 or 0.567**