Definition of gearing

Gearing

Usually the ratio of debt to equity. Gearing is a measure of balance sheet risk - the higher the proportion of debt in the funding mix, the higher profits will be in good times and the lower they will be in bad times. Gearing is associated with risk because it increases the volatility of profits - and because the lenders have first call on profits. The gearing ratio shows the amount of money borrowed in relation to the equity (or the shareholders' funds). Gearing can also be calculated as the ratio of debt to debt plus equity or the ratio of equity to total assets or debt to EBITDA. In the US, gearing is referred to as leverage.

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