what is gearing 
gearing refers to the relationship or ratio of a company s debt to equity d e gearing shows the extent to which a firm s operations are funded by lenders vs shareholders in other words it measures a company s financial leverage when the proportion of debt to equity is great then a business may be thought of as being highly geared or highly leveraged nez riaz investopediaunderstanding gearinggearing is measured by a number of ratios including the d e ratio shareholders equity ratio and debt service coverage ratio dscr which indicate the level of risk associated with a particular business the appropriate level of gearing for a company depends on its sector and the degree of leverage of its corporate peers for example a gearing ratio of 70 shows that a company s debt levels are 70 of its equity a gearing ratio of 70 might be very manageable for a utility company as the business functions as a monopoly with support from local government channels but may be excessive for a technology company with intense competition in a rapidly changing marketplace special considerationsgearing or leverage helps to determine a company s creditworthiness lenders may consider a business s gearing ratio when deciding whether to extend it credit to which a lender might add factors like whether the loan would be supported with collateral and if the lender would qualify as a senior lender with this information senior lenders might choose to remove short term debt obligations when calculating the gearing ratio as senior lenders receive priority in the event of a business s bankruptcy in cases where a lender would be offering an unsecured loan the gearing ratio could include information about the presence of senior lenders and preferred stockholders who have certain payment guarantees this allows the lender to adjust the calculation to reflect the higher level of risk than would be present with a secured loan gearing vs riskin general a company with excessive leverage demonstrated by its high gearing ratio could be more vulnerable to economic downturns than a company that s not as leveraged because a highly leveraged firm must make interest payments and service its debt via cash flows which could decline during a downturn on the other hand the risk of being highly leveraged works well during good economic times as all of the excess cash flows accrue to shareholders once the debt has been paid down example of gearingas a simple illustration in order to fund its expansion xyz corp cannot sell additional shares to investors at a reasonable price instead it obtains a 10 000 000 short term loan currently xyz corp has 2 000 000 of equity thus the debt to equity d e ratio is 5 10 000 000 total liabilities divided by 2 000 000 shareholders equity equals 5 xyz corp definitely would be considered highly geared 