What Is Gearing?

Gearing measures the proportion of a company's long-term finance that comes from debt relative to equity. It's a key indicator of financial risk: a highly geared company relies heavily on borrowing, which means fixed interest commitments and greater vulnerability if profits fall. Lenders, investors and analysts all watch gearing closely.

How is gearing calculated?

There are two common measures:

• Debt-to-equity: debt ÷ equity.
• Debt-to-total-capital: debt ÷ (debt + equity).

Be consistent about whether you use book values or market values, and be clear which measure the question wants — mixing them is a common error.

Why gearing matters

Higher gearing amplifies returns to shareholders when things go well, because debt is a fixed cost — profits above the interest bill flow to equity. But it also amplifies risk: if profits fall, interest still has to be paid, squeezing or wiping out returns to shareholders. This is financial risk.

Interest cover

Gearing is often assessed alongside interest cover (profit before interest and tax ÷ interest), which shows how comfortably a company can meet its interest payments. Low interest cover reinforces concerns raised by high gearing.

Gearing appears throughout ACCA FM and FR ratio analysis. Practising interpretation questions and marking them against the official ACCA scheme with The 50% Club shows you exactly where your analysis loses marks — the fastest way to make gearing a strength.