Gearing ratios

What is the equation for gearing ratio?

Non-current liabilities/(total equity + non-current liabilities) x100

What does gearing ratio show?

Gearing shows the percentage of where a business gets its money from. i.e. What portion of its finance comes from long term depts(non current liabilities) rather than shares (equity)

What does a gearing ratio above 50% mean?

The business is high geared. This means more than half its assets come from long term assets. (a gearing ratio between 25-50% is standard )

What are the reward of a high gearing business?

High gearing is risky as they my not be able to repay loans due to being more vulnerable to changing interest rates. But high risk means potential reward which means;

• Extra funds for expansion

• Large growth phase

• Less risk when interest rates are low