FINANCE

Corporate Finance

Corporate Finance

Part A

Analysis of Gearing Ratios & Overall Gearing Situation of Procter & Gamble (FTSE 100)

Gearing Ratio

Gearing ratios are among the most useful and significant ratios used for analyzing the financial position as well as financial performance throughout the years of the company. These ratios basically compare some forms of owner's equity or capital to borrowed funds; thus gearing is a financial leverage measure that represents a level to which a company's activities are funded by its owner's equity as compared to creditor's funds (Riley, 2012). This indicates that the higher the gearing ratio is, the higher the risk associated with company, where, an acceptable level of leverage can be identified by comparing ratios of the firm with the same industry.

Gearing ratios therefore mainly include ratios like debt to equity ratio, debt to capital ratios, and interest coverage ratio. A firm having high rate of gearing ratio indicates a high leverage which means it is more vulnerable to downturns in the business cycle as it will have to continue its debt despite the sales are going bad. On the other hand, a larger portion of equity offers a cushion and is seen as a measure of financial strength. As far as Procter & Gamble is concern, its gearing ratios are discussed below in order to come up with the conclusion regarding company's gearing position.

Gearing Ratios

2012

2011

2010

2009

Debt to Equity

0.47

0.47

0.49

0.59

Debt to Capital

0.32

0.32

0.33

0.37

Interest Coverage

19.69

19.43

18.91

13.86

Debt to Equity Ratio

Debt to equity ratio is calculated by dividing total debt to total shareholder's equity. In case of Procter & Gamble Company, the debt to equity ratio has been on improving trend since 2009 to 2012; however, it increased during 2008-09. Procter & Gambles' long-term as well as short-term debt has been on decreasing as well as increasing trend throughout these four years, however, this increase or decrease is in line with increase and decrease in shareholder's equity. It can be seen from financial statements of Procter and Gamble that the debt of a firm is decreasing slightly more than the decrease in shareholder's equity, due to which debt to equity of the company is on improving trend.

As we know that a high rate of debt to equity ratio suggests a high leverage of the company, which means that the company has to keep paying debt even when the economy or business of a firm itself is down; thus resulting in more problems for the firm. So, the more debt company increase, more issues can be faced in critical economic or business situation, where, if the shareholder's equity in the firm is increasing it means that more cushion is possessed by the firm for difficult or low business situations and therefore provides strength to the company. Keeping in view this, it can be stated that Procter & Gambles's debt to equity ratio is improving as the debt of the company has been on decreasing trend slightly more than shareholder's equity, indicating that shareholder's equity of the company is quite stable and ...