Capital Gearing

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DEFINITION of 'Capital Gearing'

The degree to which a company acquires assets or to which it funds its ongoing operations with long- or short-term debt. Capital gearing will differ between companies and industries, and will often change over time.

Capital gearing is also known as "financial leverage".

BREAKING DOWN 'Capital Gearing'

In the event of a leveraged buyout, the amount of capital gearing a company will employ will dramatically increase as the company increases its debt in order to finance the acquisition. When analyzing a firm undergoing a leveraged buyout, it is important to consider the firm's ability to service the additional interest payments on an after-tax basis, as well as the likelihood of the firm paying off the new debt as it matures.

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