Financial Terms / gearing

Understanding Financial Gearing

Gearing measures the extent to which a company's operations are funded by lenders, otherwise known as financial leverage.

Formula

Net Gearing Ratio = (Total Debt − Cash & Cash Equivalents) ÷ Total Equity

How do I calculate the gearing?

It is important to understand how to calculate gearing in order to make informed financial decisions. Gearing is typically calculated using the debt-to-equity ratio, which is a general classification of a financial ratio. The debt ratio is also a gearing ratio. The net gearing ratio is calculated by netting long-term debt, short-term debt, and bank overdrafts and expressed as a percentage. The formula for calculating the net gearing ratio is Net Gearing Ratio = (Total Debt − Cash & Cash Equivalents) ÷ Total Equity. Generally, debt-to-equity ratios above 25% are considered low-risk. Programs such as Sourcetable can be used to calculate the gearing ratio.

What is Gearing?

Gearing is a measure of financial leverage and is also known as leverage. It is measured by various leverage ratios and is important because it affects a company's creditworthiness.

What is the formula for calculating Gearing?

The formula for calculating Gearing is: Total Liabilities / Total Assets

What is the importance of Gearing?

Gearing is important because it affects a company's creditworthiness. Lenders may consider a company's gearing ratio when deciding whether to provide credit.

Key Points

How do I calculate gearing?
Net Gearing Ratio = (Total Debt − Cash & Cash Equivalents) ÷ Total Equity
Net Gearing Ratio
The net gearing ratio is a measure of a company's financial leverage and is calculated by dividing total debt by total shareholders' equity.
Debt-to-Equity Ratio
The debt-to-equity ratio is used to measure how well a company is financing its operations and growth by comparing the total debt to total shareholders' equity.
Capital Gearing
Capital gearing is a measure of how much debt is being used to finance a company's assets and is calculated by dividing total debt by total assets.

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