A gearing ratio is a category offinancial ratios that compare company debt relative to financial metrics such as total equity or assets. Investors, lenders, và analysts sometimes use these types of ratios khổng lồ assesshow a company structures itself & the amount of risk involved with its chosen capital structure.

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## What Is a Gearing Ratio?

A gearing ratio is a measurement of a company”s financial leverage, or the amount of business funding that comes from borrowed methods (lenders) versus company owners (shareholders). Well-known gearing rattiện ích ios include debt-to-equity, debt-to-capital & debt-service ratgame ios.

Although financial leverage and financial risk are not the same, they are interrelated. Measuring the degree to lớn which a company uses financial leverage is a way khổng lồ assess its financial risk.

Lenders may use gearing ratquả táo lớn decide whether or not to lớn extkết thúc credit, & investors may use them lớn determine whether or not to lớn invest in a business. A higher gearing ratio usually indicates higher financial risk.

While there is no set gearing ratio that indicates a good or bad structured company, general guidelines suggest that between 25% & 50% is best unless the company needs more debt to operate.﻿﻿

## How Do You Calculate a Gearing Ratio?

There are many types of gearing ratquả táo, but a common one to use is the debt-to-equity ratio. To calculate it, you add up the long-term and short-term debt & divide it by the shareholder equity. If you don”t have sầu any shareholders, then you (the owner) are the only shareholder, & the equity in this equation is yours.

Long-term debt includes loans, leases, or any other size of debt that requires payments at least a year out. Short-term debt usually requires payment within a year.

## How Gearing Ratgame ios Work

If your company had \$100,000 in debt, and your balance sheet showed \$75,000 of shareholders” or owners” equity, then your gearing ratio would be about 133%, which is generally considered high.

Raising capital by continuing khổng lồ offer more shares would help decrease your gearing ratio. For example, if you managed to lớn raise \$50,000 by offering shares, your equity would increase to lớn \$125,000, và your gearing ratio would decrease to lớn 80%.

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Another method to lớn decrease your gearing ratio is khổng lồ increase your sales in an attempt khổng lồ increase revenue. You could also try khổng lồ convince your lenders lớn convert your debt inkhổng lồ shares.

## Limitations of Gearing Ratgame ios

The results of gearing ratio analysis can add value khổng lồ a company”s financial planning when compared over time. But as a one-time calculation, gearing ratquả táo may not provide any real meaning.

It”s also important lớn remember that although high gearing ratio results indicate high financial leverage, they don”t always mean that a company is in financial diáp lực. While firms with higher gearing ratgame ios generally carry more risk, regulated entities such as utility companies commonly operate with higher debt levels.

Monopolistic companies often also have a higher gearing ratio because their financial risk is mitigated by their strong industry position. Additionally, capital-intensive industries, such as manufacturing, typically finance expensive sầu equipment with debt, which leads lớn higher gearing ratgame ios.

For this reason, it”s important khổng lồ consider the industry that the company is operating in when analyzing it”s gearing ratio, because different industries have sầu different standards.

A gearing ratio compares the funds a company borrows relative sầu lớn its equity, or capital.Different types of gearing rattiện ích ios exist, but a common one is the debt-to-equity ratio.A higher gearing ratio usually indicates higher financial risk khổng lồ stockholders and lenders.It”s important lớn consider the industry và type of company when analyzing and comparing gearing rattiện ích ios.

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