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.
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