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Gearing Ratio Calculator

Measure of financial leverage.

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Gearing Ratio

Formula first

Overview

The gearing ratio is a financial leverage metric that represents the proportion of a company's total capital provided by debt versus equity. This specific formulation, often called the debt-to-capital ratio, evaluates the extent to which a firm's operations are funded by lenders relative to the total capital investment.

Symbols

Variables

G = Gearing Ratio, D = Total Debt, E = Total Equity

Gearing Ratio
Total Debt
$
Total Equity
$

Apply it well

When To Use

When to use: This ratio is best used during financial health audits and credit risk assessments to determine if a company is over-leveraged. It is particularly relevant for capital-intensive industries like utilities and telecommunications where significant borrowing is required to fund infrastructure.

Why it matters: Understanding gearing is critical because it reveals a company's financial stability; high gearing increases the risk of insolvency during economic downturns due to fixed interest obligations. Conversely, optimal gearing can enhance shareholder returns through the effective use of leverage.

Avoid these traps

Common Mistakes

  • Mixing up debt/equity ratio vs gearing ratio.
  • Ignoring short-term debt.

One free problem

Practice Problem

A manufacturing firm reports a total debt of 600,000 and total shareholder equity of 400,000. Calculate the gearing ratio for the firm.

Total Debt600000 $
Total Equity400000 $

Solve for:

Hint: Add debt and equity together first to find the total capital employed.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Wikipedia: Gearing (finance)
  2. Britannica: Financial ratio
  3. Britannica: Gearing ratio
  4. Wikipedia: Debt-to-capital ratio
  5. Brigham and Houston Fundamentals of Financial Management
  6. Ross, Westerfield, Jaffe Corporate Finance
  7. Weygandt, Kimmel, Kieso Financial Accounting: Tools for Business Decision Making
  8. Brealey, Myers, Allen Principles of Corporate Finance