John Jones is considering purchasing shares in one of two companies and has extracted the following information from the statement of financial position of each company.

Required:
(a) Define the term ‘gearing’ stating clearly what is meant by a low gearing ratio.
(b) Calculate the gearing factor for each company.
(c) Explain to John Jones the significance of gearing to an ordinary shareholder in each of the companies above.
(d) Assuming for each company a trading profit of £200,000 before interest and an ordinary dividend of 15% show the movement on retained earnings for a year for each company. You should ignore taxation.

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Authorised share capital £1 ordinary shares 8% £1 preference shares Issued share capital £1 ordinary shares 8% £1 preference shares Reserves Share premium Retained earnings Non-current liabilities: loan notes 10% loan notes (2017) 12% loan notes (2023) Company A Plc Company B Plc £000 £000 600 400 300 200 300 400 400 1,000 800 400 200 200