i) Operating Gearing:
Operating gearing measures the sensitivity of operating profit to changes in sales volume. The formula is:
Operating Gearing=Contribution / Operating Profit

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Using GGOH’s financial data for EBIT and variable costs, calculate the contribution margin and apply it to the formula for operating gearing.

ii) Financial Gearing:
Financial gearing measures the proportion of debt in the company’s capital structure. The formula is:
Financial Gearing=Debt /​ Equity
Using GGOH’s loan and equity figures, calculate the ratio to determine financial gearing.
(5 marks)

Impact on Investor Decision:

1. High Operating Gearing: Indicates that a small change in sales can lead to a significant change in profit, increasing the risk for investors.
2. High Financial Gearing: Indicates the company relies heavily on debt financing, which increases financial risk. Investors may be concerned about GGOH’s ability to meet interest payments, especially if sales fluctuate.
3. Moderate Gearing: A moderate level of gearing may be attractive to investors as it shows a balanced use of debt and equity, offering potential for higher returns without excessive risk.
4. Investor’s Perspective: An investor considering GGOH would weigh these ratios to assess the risk level and the company’s capacity to generate profits while managing debt obligations.
   (5 marks)