what are gearing ratios 
gearing ratios are financial ratios that compare some form of owner s equity or capital to debt or funds borrowed by the company gearing is a measurement of the entity s financial leverage which demonstrates the degree to which a firm s activities are funded by shareholders funds versus creditors funds the gearing ratio is a measure of financial leverage that demonstrates the degree to which a firm s operations are funded by equity capital versus debt financing investopedia xiaojie liuunderstanding gearing ratiosthe best known examples of gearing ratios include debt to equity ratio total debttotal equitytimes interest earned ebittotal interestequity ratio equityassetsdebt ratio total debttotal assets begin aligned text debt to equity ratio frac text total debt text total equity text times interest earned frac text ebit text total interest text equity ratio frac text equity text assets text debt ratio frac text total debt text total assets end aligned debt to equity ratio total equitytotal debt times interest earned total interestebit equity ratio assetsequity debt ratio total assetstotal debt a higher gearing ratio indicates that a company has a higher degree of financial leverage it s more susceptible to downturns in the economy and the business cycle because companies that have higher leverage have higher amounts of debt compared to shareholders equity entities with a high gearing ratio have higher amounts of debt to service companies with lower gearing ratio calculations have more equity to rely on for financing 1gearing ratios are useful for both internal and external parties financial institutions use gearing ratio calculations when they re deciding whether to issue loans loan agreements may also require companies to operate within specified guidelines regarding acceptable gearing ratio calculations internal management uses gearing ratios to analyze future cash flows and leverage interpreting gearing ratiosa high gearing ratio typically indicates a high degree of leverage but this doesn t always indicate that a company is in poor financial condition a company with a high gearing ratio has a riskier financing structure than a company with a lower gearing ratio regulated entities typically have higher gearing ratios because they can operate with higher levels of debt 1companies in monopolistic situations often operate with higher gearing ratios because their strategic marketing position puts them at a lower risk of default industries that use expensive fixed assets typically have higher gearing ratios because these fixed assets are often financed with debt a firm s gearing ratio should be compared with the ratios of other companies in the same industry example of how to use gearing ratiosassume that a company has a debt ratio of 0 6 this figure alone provides some information as to the company s financial structure but it s more meaningful to benchmark it against another company in the same industry the company s debt ratio might have been 0 3 last year the industry average is 0 8 and the company s main competitor has a debt ratio of 0 9 more information is derived by comparing gearing ratios to each other a company with a 0 3 ratio is performing comparatively well in its industry when the industry average ratio result is 0 8 and the competition s gearing ratio result is 0 9 