Gearing ratio

What is a gearing ratio?

A gearing ratio is a financial ratio that compares a company's debt to its equity. The higher the ratio, the more leveraged the company is. A company with a high gearing ratio is more risky than a company with a low gearing ratio because it has more debt and less equity to cover its debts if something goes wrong.

How is a gearing ratio calculated?

The gearing ratio is calculated by dividing a company's debt by its equity. For example, if a company has $10 million in debt and $5 million in equity, its gearing ratio would be 2.0.

What is the ideal gearing ratio?

There is no ideal gearing ratio because each company is different and each industry has different norms. A company's gearing ratio should be compared to other companies in its industry to see if it is high or low. A company with a higher gearing ratio is more risky than a company with a lower gearing ratio.

What are the benefits of a high gearing ratio?

A high gearing ratio can be beneficial because it means that the company can use debt to finance its growth. This can help the company to grow faster than it would if it was only using equity to finance its growth. A high gearing ratio can also help to make a company's earnings more volatile, which can make the stock more attractive to investors.

What are the risks of a high gearing ratio?

The main risk of a high gearing ratio is that the company may not be able to make its debt payments if its income falls. This could lead to the company defaulting on its debt and having to declare bankruptcy. A high gearing ratio can also make a company's earnings more volatile, which can make the stock less attractive to investors.

How can I reduce my gearing ratio?

There are a few ways to reduce your gearing ratio. One way is to use equity to finance your growth instead of debt. Another way is to pay down your debt. You can also try to negotiate longer terms for your debt so that you have more time to pay it off.

What is the difference between a gearing ratio and a leverage ratio?

A gearing ratio is a financial ratio that compares a company's debt to its equity. A leverage ratio is a financial ratio that compares a company's debt to its assets. The two ratios are similar, but the gearing ratio is more commonly used.

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