Gearing

Gearing: is another name for Debt-equity Ratio. It is the net borrowings of a company divided by its tangible shareholders’ equity expressed as a percentage:

Gearing = (Total borrowings – cash) X 100/Tangible shareholders’ equity

Gearing is another highly debated financial ratio. It is useful to know how much debt a business carries, but it is best to keep it in perspective by comparing it to other competitors in the same industry, considering the stability of the company’s cash flow, and if the valuation of the company’s assets are accurate (if assets are carried at cost ad not current value, the debt versus equity could be falsely high). You also want to know how changes in interest rates might affect any debt on a variable interest payment.

If profits are rising, high gearing will enhance financial results and returns to shareholders. However, good times don’t last forever, and a prudent investor will want to look for the enhanced safety of a company with acceptable growth levels and the ability to finance growth with internal cash flow–thus a low gearing ratio.