Gearing compares fixed-interest debt to total capital. Which description best describes total capital employed?

• A. Equity plus fixed-interest debt
• B. Current liabilities
• C. Net profit
• D. Inventory

Answer: (A)

Gearing compares the fixed-interest debt used to fund the business with the overall capital invested in it. Total capital employed represents the permanent funding available for operations, which is typically equity plus long-term debt (fixed-interest debt). That’s why describing total capital employed as equity plus fixed-interest debt is the best fit. Current liabilities are short-term obligations and part of working capital, not the long‑term funds the gearing ratio relies on. Net profit is income, not a funding source, and inventory is a current asset tied up in day-to-day operations, not a source of permanent capital. An equivalent view is total assets minus current liabilities, which also equals equity plus long-term liabilities.