Which long-term liquidity ratio measures the percentage of capital employed funded by long-term liabilities such as debentures and mortgages?

• A. Gearing
• B. Current ratio
• C. Gross profit margin
• D. Liquid assets

Answer: (A)

The idea being tested is how much of a company’s capital used to run the business comes from long-term borrowings versus from equity. Gearing expresses long-term financial leverage as a percentage. It is typically calculated as long-term debt divided by the sum of long-term debt and equity, showing the portion of capital employed funded by long-term liabilities such as debentures and mortgages. A higher gearing ratio signals greater reliance on debt and hence higher financial risk if earnings fall, while a lower gearing means more funding from equity and lower risk. The other options don’t capture the funding mix: the current ratio looks at short-term liquidity, gross profit margin is about profitability, and liquid assets refer to cash or near-cash assets rather than how capital is financed.