Capital gearing is the balance between the capital a company owns and the funding it gets from short- or longterm loans. Investors and lenders use it to assess risk.
Most businesses operate on some form of gearing (also called financial leverage), funding their operations in part by borrowing money via loans and bonds. If the level of gearing is high (that is, the business has taken on large debt in relation to its equity), investors will be concerned about the ability of the business to repay the debt. However, if the company’s profit is sufficient to cover interest payments, high gearing can provide better shareholder returns. The optimum gearing level depends on how risky a company’s business sector is, the gearing levels of its competitors, and the company’s maturity. Gearing ratios vary from country to country.
