Gearing Ratio

Loading the player...

What is the 'Gearing Ratio'

The gearing ratio is a general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.

Also known as the Net Gearing Ratio.

BREAKING DOWN 'Gearing Ratio'

The higher a company's degree of leverage, the more the company is considered risky. As for most ratios, an acceptable level is determined by its comparison to ratios of companies in the same industry. The best known examples of gearing ratios include the debt-to-equity ratio (total debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and debt ratio (total debt / total assets).

A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength.

RELATED TERMS
  1. Capitalization Ratios

    Indicators that measure the proportion of debt in a company’s ...
  2. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  3. Long Term Debt To Total Assets ...

    A measurement representing the percentage of a corporation's ...
  4. Accounting Ratio

    A way of expressing the relationship between one accounting result ...
  5. Debt/Equity Ratio

    Debt/Equity Ratio is debt ratio used to measure a company's financial ...
  6. Debt-To-Capital Ratio

    A measurement of a company's financial leverage, calculated as ...
Related Articles
  1. Investing

    What Is A Good Gearing Ratio?

    Gearing ratios are useful for evaluating a company’s financial fitness through the figures found on its profit and loss statement.
  2. Markets

    What is Gearing?

    Gearing, also called leverage, is the degree to which a company’s operations are funded by lenders versus shareholders.
  3. Investing

    How to Use the Gearing Ratio

    The gearing ratio is a figure that compares a company’s owners’ equity to the amount of money the company has borrowed.
  4. Investing

    Understanding Leverage Ratios

    Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios - including the debt, ...
  5. Trading

    The Debt To Equity Ratio

    The debt to equity ratio identifies companies that are highly leveraged and therefore a higher risk for investors. Find out how this ratio is calculated and how you can use it to evaluate a stock.
  6. Markets

    4 Leverage Ratios Used In Evaluating Energy Firms

    Analysts use specific leverage ratios to compare firms within an industry. A basic understanding of these ratios helps when evaluating oil and gas stocks.
  7. Markets

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  8. Markets

    Debt Reckoning

    Learn about debt ratios and how to use them to assess a company's financial health. You could save a lot of money!
  9. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
  10. Investing

    What Is Considered A High Debt-To-Equity Ratio?

    The debt-to-equity ratio divides a firm’s liabilities by its shareholders’ equity to measure its financial leverage.
RELATED FAQS
  1. What is the difference between the gearing ratio and the debt-to-equity ratio?

    Dive deeper into gearing ratios: what are they, how are they used and why the debt to equity ratio is one of the most popular ... Read Answer >>
  2. What is the difference between a capital gearing ratio and a net gearing ratio?

    Understand the definition of gearing in the finance industry, the difference between net gearing and capital gearing ratios ... Read Answer >>
  3. What is considered to be a bad gearing ratio?

    Understand the basics of gearing, including the net gearing ratio, what constitutes a bad gearing ratio and how this figure ... Read Answer >>
  4. What is the most widely used gearing ratio?

    Understand the most commonly used gearing, or leverage, ratio used to evaluate a company's financial condition, the debt ... Read Answer >>
  5. Which financial ratio best reflects capital structure?

    Learn about the debt-to-equity ratio and why this metric is widely considered the most useful reflection of a company's capital ... Read Answer >>
  6. What are financial risk ratios and how are they used to measure risk?

    Explore some of the primary financial risk ratios that investors and analysts commonly use to evaluate a company's overall ... Read Answer >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center