Gearing focuses on long term liquidity and shows whether a firm’s capital structure is likely to continue to meet interest payments and repayments on long term borrowing.

Capital structure — What proportions of capital originate from each source

Two ways of measuring gearing

  • Debt/equity ratio
  • Gearing ratio

Debt to equity ratio (%)

Debt/Equity * 100

  • Higher is riskier
  • Higher can lead to much more profit, or much more catastrophic failure
  • Lower is safer, but earnings are unlikely to spike
  • The best choice depends on the business

Gearing ratio (%)

Non-current liabilities / Total equity + non-current liabilities * 100


  • If ratio is 50% or above, normally said to be high
  • Gearing of less than 20% normally said to be low
  • But levels of acceptable gearing depend upon the business and industry

  1. 50%
  2. 20%