Using the figures below, calculate the Debt/Equity ratio (Gearing) of Lalco Ltd - Leaving Cert Business - Question 5 - 2016

Equity Capital is calculated by summing the Ordinary Share Capital and Reserves:

$ext{Equity Capital} = ext{Ordinary Share Capital} + ext{Reserves}$

Substituting the values:

$ext{Equity Capital} = €220,000 + €130,000 = €350,000$

The Debt/Equity ratio (Gearing) is calculated using the formula:

$ext{Debt/Equity Ratio} = \frac{\text{Debt Capital}}{\text{Equity Capital}}$

Substituting the values:

$ext{Debt/Equity Ratio} = \frac{€700,000}{€350,000} = 2:1$

Lalco Ltd. is highly geared, which means the firm has a higher proportion of debt compared to equity. This situation often results in high interest payments, potentially leading to low or no dividend payments to shareholders. Additionally, the firm may face challenges in securing further borrowing in the future as its ability to repay debts could be questioned. This level of gearing impacts the firm's overall cash flow and may consequently affect its profitability.