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