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 riskier than a company with a low gearing ratio (under 25%) because it has more debt and less equity to cover its debts if something goes wrong.
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.
There is no ideal gearing ratio because each company is different, and each industry has different norms. However, a gearing ratio under 25% is typically less risky to investors. 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 riskier than a company with a lower gearing ratio, but it can have its benefits.
A high gearing ratio of 25% to 50% can be beneficial because the company can leverage debt to investors to finance its growth. This can help the company grow faster than it would if it only used equity to finance its growth.
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, making the stock less attractive to investors.
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.
The two ratios are similar, but the gearing ratio is more commonly used. A gearing ratio is a financial ratio that compares a company's debt to its equity, while a leverage ratio is a financial ratio that compares a company's debt to its assets.