What is 'Gearing' and how is it interpreted?

Gearing is a ratio that looks at the proportion of capital funded by debt.
It is used as a measure of risk as it assesses how much of a business's capital is funded by loans - the higher the gearing ratio, the higher the risk.
Gearing = (Non-Current Liabilities/Capital Employed) x 100
When interpreting Gearing over 50% is described as 'Highly Geared', 25%/50% is a normal range and less than 25% is 'Lowly Geared'. However, gearing can never be definitively good or bad as it depends on the external environment that the Business is operating in - for example low gearing is preferable during periods of recession whilst growing firms will be happy with high gearing.

Answered by Business Studies tutor

2412 Views

See similar Business Studies A Level tutors

Related Business Studies A Level answers

All answers ▸

Is a just in time (JIT) stock management system likely to benefit a clothing retailer?


What is the Ansoff Matrix


What is meant by the term 'gearing'?


Explain how globalisation can increase operational efficiency?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning