gearing

1. A system of gears and associated elements by which motion is transferred within a machine.
2. The act or technique of providing with gears.

A fundamental analysis ratio of a company's level of long-term debt to its equity capital and is expressed in percentage form.

A company with a high gearing - more long-term liabilities than shareholder equity - are considered speculative.

Investopedia Says:
In simpler terms the gearing explains how a company finances its capital, either through outside lenders or through shareholders.

Also known as "financial leverage".

Related Links:
Here we explain how to evaluate whether a company's debt will pose a threat to investors. When Companies Borrow Money
Learn what it means to do your homework on a company's performance and reporting practices before investing. Advanced Financial Statement Analysis

The use of borrowed money to complete an investment purchase.
Example: The effects of financial leverage on return on Equity are shown in Table 23.

Note: If Debt Service required is high compared to income, effect of leverage may be to reduce return to equity.

Table 23 Financial Leverage Table

No leverage Leverage with 50% debt

Cost $100,000 Cost $100,000

Debt 0 Debt $50,000

Equity $100,000 Equity $50,000

Income $20,000 Income $20,000

Debt service 0 Debt service - 7,500

_______ _______

Cash to equity $20,000 Cash to equity $12,500

Return 20,000 = 0.20 Return 12,500 = 0.25

______ ______

on equity 100,000 on equity 50,000

Portion of a firm's assets financed with debt instead of equity. It involves contractual interest and principal obligations. Financial leverage benefits common stockholders as long as the borrowed funds generate a return in excess of the cost of borrowing, although the increased risk can offset the general cost of capital. For this reason, financial leverage is popularly called Trading on Equity. Financial leverage is measured by the Debt-Equity Ratio.

Ratio of debt to equity.