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Gearing ratio definition
Gearing ratio is a measure of how much a company funds itself with debt compared with equity. It shows how dependent the business is on borrowed money rather than shareholder funds.
It is usually calculated as total debt divided by shareholder equity, expressed as a percentage. A higher gearing ratio means the company leans more on debt, which raises financial risk when earnings fall or interest costs climb, while a lower ratio points to a more conservative capital structure.
Gearing ratio measures leverage at the level of a company's balance sheet, which is different from the leverage a trader applies to a single position. High gearing can lift shareholder returns when profits grow, but it can also strain solvency, raise interest payments, and weaken credit quality during weak conditions.
Gearing ratio Example
A company has USD 600,000 in total debt and USD 400,000 in shareholder equity.
The gearing ratio is:
USD 600,000 √∑ USD 400,000 √ó 100 = 150%
A 150% gearing ratio means the company's debt is 1.5 times its equity.
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