July 04, 2025
4 mins read
When you look at a company’s balance sheet, the first thing that might catch your eye isn’t always the revenue or even the profit — it’s the debt. And that’s where the gearing ratio comes in for you. It helps you see just how much the business relies on borrowed money compared to its own funds.
The gearing ratio meaning is simple: it shows the proportion of debt to equity. In other words, it tells you how much of a company’s growth is financed by loans rather than shareholder capital.
Now here’s where it gets interesting. If the gearing ratio is high, the company is leaning heavily on debt. That might feel risky. But the risk depends a lot on the sector. For instance, utilities or infrastructure companies often operate comfortably with more debt. On the other hand, businesses in unpredictable industries might struggle with the same ratio. Context really is everything here.
When you dig deeper, you’ll realise that there isn’t just one gearing ratio. Analysts use different versions, each showing a slightly different side of the picture:
Debt to equity ratio measures how much debt exists for every rupee of equity invested. It’s the most widely used version of the gearing ratio and helps assess financial leverage and borrowing dependence of a company.
This ratio shows the share of financing that comes from equity. A higher figure indicates the company relies less on borrowed funds, reflecting greater financial strength, stability, and reduced repayment obligations in the long term.
The debt ratio compares total debt against total assets. It highlights how much of the company’s resources are financed through loans, helping investors and lenders evaluate risk levels and financial obligations linked with borrowings.
This ratio studies the relationship between equity share capital and fixed-interest securities. It indicates a company’s long-term capital structure, showing whether reliance is more on equity funding or borrowed fixed-interest securities.
Additionally Read: What is Ratio Analysis
The formula is thankfully simple and direct.
Gearing Ratio = (Total Debt / Shareholders’ Equity) × 100
Imagine this: a company has ₹10 crore in debt and ₹25 crore in equity. When you apply the formula:
(10 ÷ 25) × 100 = 40%
That percentage tells you 40% of the company’s operations are financed by debt. Straightforward, but surprisingly insightful once you start comparing it across firms.
This is how you would do it in real life:
First, make a list of all the company's debts, including both short-term and long-term loans. Next, figure out the shareholders' equity, which is the difference between total assets and total liabilities. After you get those two numbers, use them to fill in the formula:
(Total Debt / Shareholders' Equity) × 100
The last number, which is a percentage, shows how much the company relies on debt. The more money the corporation owes, the higher the percentage.
Gearing ratios, like any other financial tool, have pros and cons.
Helps Lenders Assess Risk: Lenders and banks can easily measure the risk of lending. A high gearing ratio warns them about possible repayment issues, allowing safer credit decisions.
Financial Health Indicator: The ratio acts like a financial health check for businesses. It highlights debt levels, cash flow, and leverage.
Early Warning System: Companies can identify potential financial stress early and take corrective measures before issues worsen.
Supports Decision-Making: By monitoring gearing, firms can make informed choices about borrowing, expansion, or cost management, ensuring better financial stability and growth opportunities.
May Mislead Without Context: A high gearing ratio might suggest financial troubles, but it doesn’t always mean the company is struggling. Additional details are needed to understand the full picture.
Limited Standalone Use: The ratio alone isn’t sufficient for analysis. It becomes more meaningful when combined with other financial indicators.
Requires Comparison: Gearing is most useful when compared with industry peers or the company’s past performance. Without such context, it may lead to incorrect conclusions.
Doesn’t Show Qualitative Factors: The ratio cannot capture management quality, market conditions, or growth potential.
People use gearing ratios for several things:
When banks and lenders decide whether to provide you credit, they look at your gearing ratios. Lenders can think your business is unsafe if your ratio is too high. That's especially true for new businesses. But in stable fields like utilities or energy, high gearing might not be a deal breaker.
Before you invest, you should verify the gearing ratio periodically. A low ratio means that the company is financially stable, which is a good thing. On the other hand, you could think twice about a corporation that is already in debt and has to pay interest.
When you compare it to others, a gearing ratio can look scary at first. It could seem like a lot to ask for a 60% ratio, but if your competitors are at 70% or 80%, it doesn't seem so bad. The story is very different when you think about the industry.
Here are some common approaches for a business to lower its gearing ratio:
Issue more shares: A company can pay off its debts and improve its financial situation by issuing new shares to get more equity capital.
Turn debts into equity: Sometimes, lenders will agree to trade debt for stock. This decreases their loans and gives them ownership stakes instead.
Cut costs: Getting rid of costs that aren't necessary frees up money. You can then utilise that extra money to pay off your loans faster.
Increase profits: The company may be able to slowly pay off its obligations with more money by focusing on increasing sales.
When someone refers to the gearing ratio, they mean a simple approach to figure out how a business's money works. It shows you how much money the business has borrowed and what it means for the chance of losing money.
But remember that one number doesn't usually tell the whole story. The gearing ratio is only useful when you look at it over time, compare it to other companies, and look at other financial measures. After that, it only gives a fuller picture of how stable a company is.
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A low gearing ratio means a company uses less debt and more equity to finance its operations. This typically indicates financial stability and lower risk, as the business isn't heavily dependent on borrowed money to operate.
The gearing ratio indicates the proportion of a company’s capital that is financed through debt compared to equity. A higher ratio indicates a greater risk due to debt, while a lower ratio suggests a safer, more equity-backed financial structure.
The gearing ratio is calculated as follows: Gearing Ratio = (Total Debt / Total Equity) or (Debt / (Debt + Equity)), depending on the method used. It's usually expressed as a percentage to show leverage.
An ideal gearing ratio depends on the industry, but generally, 25% to 50% is considered healthy. It exhibits a balanced mix of debt and equity, enabling growth without incurring excessive financial risk.
You can lower your gearing ratio by reducing debt, issuing more equity, or increasing retained earnings. Paying off loans or improving profits also helps reduce reliance on borrowed funds, making the business more stable.
A gearing ratio of 0.5 means that for every ₹1 of equity, the company has ₹0.50 in debt. It indicates moderate leverage and suggests the company isn’t overly dependent on borrowed money for its operations.
A high gearing ratio indicates that the company has more debt than equity. This raises financial risk, particularly if earnings decline or interest rates increase. However, it can also mean faster growth if the borrowed money is used wisely.
Yes, a 30% gearing ratio is generally considered good. It means the company has a low level of debt relative to equity, which often signals strong financial health and less risk during economic downturns.
Not always. A high gearing ratio can help fuel growth but it increases financial risk. A low ratio indicates stability, but it may limit the ability to expand. The right choice depends on the company’s goals, industry, and market conditions.
The gearing ratio helps assess financial risk and capital structure. It reveals the extent to which a company relies on debt, helping investors assess whether the firm can effectively manage downturns or rising interest costs.
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