Ratio Analysis: Gearing



Gearing measures the proportion of a business' capital provided by debt.

Gearing % = Non-current liabilities / Capital employed x 100

Evaluating the Gearing %

  • Gearing ratio of 50%+ is said to be high
  • Gearing ratio of less than 20% is said to be low
  • Level of acceptable gearing is dependant on the business and its industry

Benefits of high gearing

  • Less capital required from shareholders for investment
  • Easy to pay interest if profits and cash flow are strong

Benefits of low gearing

  • Business has capacity to add debt if required
  • Less risk 
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