ratios linking firm's capital structure to business risks ratios that indicate the level of risk taken by a company as a result of its capital structure. A number of different ratios may be calculated, for example, debt ratio (total debt divided by total assets), debt-to-equity or leverage ratio (total debt divided by total equity), or interest cover (earnings before interest and tax divided by interest paid). Gearing is most frequently used to measure the return on stockholders' investment from assets, and is calculated as borrowed capital divided by equity capital. This ratio is one of the most difficult to manage because it needs to be kept in balance. If it is high then the return to equity stockholders will be, but the risk to stockholders and fixed interest lenders is greater.
Related definitions of "gearing ratios"
- Also called leverage ratios