10.2.4—Gearing ratio

Gearing compares long-term debt or other fixed-return finance with capital employed or equity, depending on the definition used. It signals financial risk and dependence on lenders.

Debt can magnify returns when performance is strong, but interest and repayment remain when profits fall. Interpretation needs interest cover, cash flow, asset security and industry context.

A business funding expansion mostly with debt may grow faster, but a demand shock can leave it unable to service repayments even if the assets remain valuable.

High gearing is not automatically bad and low gearing is not automatically safe; risk depends on stability and cash generation.