“Gearing” is a financial term that refers to the proportion of a company’s capital that is in the form of debt compared to equity. It’s also known as “leverage” and is expressed as a ratio. Gearing is an important metric for assessing a company’s financial risk and its capital structure.

The gearing ratio is calculated using the following formula:

\[ \text{Gearing Ratio} = \left( \frac{\text{Debt}}{\text{Equity + Debt}} \right) \times 100 \]

Here, “Debt” represents the total debt of the company, and “Equity” represents the shareholders’ equity or net assets. The ratio is usually expressed as a percentage.

### Key Points about Gearing:

1. **High Gearing:** A high gearing ratio indicates that a significant portion of the company’s capital is in the form of debt. While this can enhance returns on equity when the company is profitable, it also increases financial risk, as the company has to meet interest and principal payments on its debt.

2. **Low Gearing:** A low gearing ratio suggests that the company relies more on equity financing. While this may reduce financial risk, it might limit the company’s ability to take advantage of financial leverage for potential growth.

3. **Risk and Return:** Gearing reflects the trade-off between risk and return. Higher gearing may lead to higher returns on equity when things go well, but it can also amplify losses when the company faces financial challenges.

4. **Interest Coverage Ratio:** The gearing ratio is often used in conjunction with the interest coverage ratio. The interest coverage ratio measures the company’s ability to cover its interest expenses with its earnings. A higher interest coverage ratio is generally considered more favorable.

5. **Investor Perception:** Investors and analysts assess a company’s gearing ratio to understand its financial risk and whether it aligns with their risk tolerance. Different industries may have different typical gearing ratios.

6. **Cyclical Considerations:** Gearing may vary across different stages of a business cycle. During economic downturns, highly geared companies may face challenges servicing their debt, while low-geared companies may have more financial flexibility.

7. **Debt Components:** Gearing considers all forms of debt, including bank loans, bonds, and other financial obligations.

Gearing is a useful financial metric for both investors and management to evaluate a company’s financial structure and risk profile. It’s important to consider gearing in the context of the industry, economic conditions, and the company’s specific circumstances.