Gearing Ratio

How gearing ratio works

One common version divides debt by shareholders’ equity; another compares debt with total capital. Gross debt, net debt and lease liabilities may be treated differently. The formula must be stated before interpreting the result.

Practical UK business example

A company compares a proposed loan with its equity base. Its lender includes finance commitments that management had excluded, so the two reported gearing figures initially differ.

Illustrative example only; not a finance quotation or a client case study.

Why it matters

Gearing helps show reliance on borrowed money and the potential sensitivity of owners’ capital to losses or higher financing costs.

Limitations and common misconceptions

There is no universal healthy gearing ratio for every sector. A percentage without the formula, reporting date and accounting context can be misleading.

Discuss business borrowing to discuss how the structure relates to your business.