gearing
the relationship between a company's borrowings (which includes both prior charge capital and long-term debt) and its stockholders' funds (common share capital plus reserves). Gearing calculations can be made in a number of ways, and may be based on capital values or on earnings/interest relationships. Overdrafts and interest paid thereon may also be included:
Profit before interest and tax/Profit before tax
shows the effect of interest on the operating profit.
Profit before interest and tax/Interest expense
shows the number of times that profit will cover interest expense.
Total long-term debt/Shareholders' funds + long-term debt
shows the proportion of long-term financing which is being supplied by debt.
Total long-term debt/Total assets
a measure of the capacity to redeem debt obligations by the sale of assets.
Operating cash flows - Taxation paid - Returns on investment and servicing of finance/Repayments of debt due within one year
measures ability to redeem debt.
A company with a high proportion of prior charge capital to shareholders' funds is high geared, and is low geared if the reverse situation applies.
Related definitions of "gearing"
- Also called financial leverage, leverage
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