Financial return calculations - part 1

In this lesson

1. 0:00 Financial return calculations overview
2. 1:14 Key formulas: ROSF, gearing, interest cover
3. 2:04 Applying formulas to debt covenants
4. 4:07 Calculating interest cover step by step
5. 5:22 Calculating gearing on market values
6. 6:29 Impact of convertible debt conversion
7. 10:14 Why interest cover increases with conversion

About this lesson

This video walks you through the formulas, shows how they're applied in real scenarios (including debt covenants), and explains what happens to these ratios when a company's capital structure changes, such as when convertible loan stock converts to equity. By the end, you'll be confident tackling both calculation questions and conceptual questions about ratio movements. The first part covers the three core formulas you need to know. Return on shareholders' funds measures profit available to ordinary shareholders against the equity invested in the business. Gearing shows the proportion of debt financing relative to total capital, calculated either as a ratio or percentage using either book values (from the accounts) or market values (for listed companies). Interest cover reveals how many times a company can cover its interest payments from operating profit—a key indicator of financial stability that lenders use to set debt covenants. You'll see how these ratios work together to assess risk and compliance. The video then applies these concepts to a worked example involving a company with debt covenants. You'll calculate whether the company meets its interest cover requirement (minimum 3 times) and gearing limit (maximum 32%), seeing how market values of debt and equity affect the outcome. The final section tackles a common exam question type: predicting the impact of a capital event (convertible debt converting to shares) on multiple ratios simultaneously. Using simple worked numbers, you'll discover why gearing falls, the share price drops, return on shareholders' funds decreases, and interest cover improves—building the intuition you need to answer these questions confidently under exam pressure.

Duration: 11m