Gearing Ratio: Measuring How Much a Company Relies on Debt to Finance Its Operations

The gearing ratio is a financial measure that shows the proportion of a company’s capital that comes from debt compared to equity.
It helps investors and analysts understand how heavily a company depends on borrowed money to finance its business activities.

In simple terms, the gearing ratio reveals how “leveraged” a company is — whether it relies more on loans or on shareholders’ funds.

Core Idea

A company’s gearing reflects its financial risk.
A high gearing ratio means the company has a large amount of debt relative to equity, which can increase potential returns but also increase financial risk.
A low gearing ratio means the company relies more on shareholders’ capital and is generally seen as financially stable but with less opportunity to boost returns through leverage.

The gearing ratio is a key indicator used by investors, creditors, and managers to assess financial strength, solvency, and long-term sustainability.

Formula

There are several ways to calculate the gearing ratio, depending on what is included in “debt” and “capital.”
A common formula is:

Gearing Ratio
=
Total Debt
Total Equity
×
100
Gearing Ratio=
Total Equity
Total Debt
​

×100

Some analysts use Debt / (Debt + Equity) or Long-term Debt / Capital Employed — the concept remains the same: comparing debt to the company’s funding base.

In Simple Terms

Gearing tells you how much of the company’s financing comes from borrowing.
If the ratio is high, it means the company is highly leveraged and must make regular interest and debt repayments.
If the ratio is low, it means the company is less dependent on debt and can better withstand economic downturns.

Example

Suppose a company has:

Total debt: $40 million

Total equity: $60 million

Gearing Ratio
=
40
60
×
100
=
66.7
%
Gearing Ratio=
60
40
​

×100=66.7%

This means 66.7% of the company’s capital structure comes from debt, suggesting it has a moderate to high level of gearing.
If profits fall, meeting debt payments could become difficult, which increases financial risk.

Real-Life Application

The gearing ratio is widely used in:

Investment analysis – to compare companies’ financial risk before investing.

Credit assessment – lenders use it to decide whether a company can handle more borrowing.

Corporate finance – management uses it to balance debt and equity efficiently.

Different industries have different norms. For example, utilities and infrastructure companies often have higher gearing due to stable cash flows, while tech companies tend to have lower gearing.

Common Misconceptions and Mistakes

“High gearing is always bad.” Not necessarily — if a company’s profits are stable, borrowing can help it grow faster.

“Gearing only looks at long-term debt.” It can include all interest-bearing debt, depending on the definition used.

“A low gearing ratio means no risk.” It reduces financial risk but can limit potential returns.

“Gearing ratios are the same across industries.” They vary widely depending on the business model and capital needs.

Related Queries Investors Often Search For

What is a good gearing ratio?

How does the gearing ratio differ from leverage?

Why do companies with stable earnings use more debt?

How can a firm reduce its gearing ratio?

What is the difference between gearing and solvency?

Summary

The gearing ratio measures the balance between debt and equity in a company’s capital structure.
It indicates financial risk, showing how much of the business is financed by borrowed money versus shareholders’ funds.
A higher ratio means greater leverage and potential returns, but also higher risk — making gearing a key tool for assessing financial stability and performance.