Gearing

Last updated Jun 12, 2023 Edit

• Business

Gearing focuses on long term liquidity and shows whether a firm’s capital structure is likely to continue to meet interest payments and repayments on long term borrowing.

Capital structure — What proportions of capital originate from each source

• Debt/equity ratio
• Gearing ratio

Debt/Equity * 100

• Higher is riskier
• Higher can lead to much more profit, or much more catastrophic failure
• Lower is safer, but earnings are unlikely to spike
• The best choice depends on the business

Non-current liabilities / Total equity + non-current liabilities * 100

• If ratio is 50% or above, normally said to be high
• Gearing of less than 20% normally said to be low
• But levels of acceptable gearing depend upon the business and industry

1. 50%
2. 20%

Business