BROWSE

Gearing

What is 'Gearing'

Gearing refers to the level of a company’s debt related to its equity capital, usually expressed in percentage form. It is a measure of a company’s financial leverage and shows the extent to which its operations are funded by lenders versus shareholders. The term "gearing" also refers to the ratio between a company’s stock price and the price of its warrants.

Explaining 'Gearing'

Gearing can be measured by a number of ratios, including the debt-to-equity ratio, equity ratio and debt-service ratio. The ratios serve as indicators regarding the level of risk associated with a particular business. The appropriate level of gearing for a company depends on its sector, as well as the degree of leverage employed by its 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% may be very manageable for a utility, as the business functions as a monopoly with support through local government channels, but it may be far too much for a technology company with high levels of competition in a rapidly changing marketplace.

Use of Gearing Ratios

Lenders may consider a business’s gearing ratio when determining whether to extend credit. This information can be combined with whether or not the loan will be supported with collateral, as well as if the lender will qualify as a senior lender should the business fail. With this in mind, senior lenders may choose to remove short-term debt obligations when calculating the gearing ratio, as senior lenders receive priority in case of the business’s bankruptcy.

Gearing Ratio and Risk

In general, a company with excessive leverage, as demonstrated by its high gearing ratio, may be more vulnerable to economic downturns. This is because it has to make interest payments and service its debt through cash flows that may be significantly lower due to the downturn. The flip side of this argument is that leverage works well during good times, since all the excess cash flows accrue to shareholders once the debt service payments have been made.


Further Reading


An investment strategy based on gearing ratio
www.tandfonline.com [PDF]
… For example the low gearing-low PE portfolio is formed every year on 1 May for nine consecutive years and the average CAR for three years holding period is 21.30 … Journal of Financial Economics, 43: 341–72 … Journal of Finance, 43: 507–22 …

The demand for external auditing: managerial share ownership, size, gearing and liquidity influencesThe demand for external auditing: managerial share ownership, size, gearing and liquidity influences
www.emerald.com [PDF]
… For example the low gearing-low PE portfolio is formed every year on 1 May for nine consecutive years and the average CAR for three years holding period is 21.30 … Journal of Financial Economics, 43: 341–72 … Journal of Finance, 43: 507–22 …

Discourses around negative gearing of investment properties in AustraliaDiscourses around negative gearing of investment properties in Australia
www.tandfonline.com [PDF]
… For example the low gearing-low PE portfolio is formed every year on 1 May for nine consecutive years and the average CAR for three years holding period is 21.30 … Journal of Financial Economics, 43: 341–72 … Journal of Finance, 43: 507–22 …

Gearing up for personalisation: training activities commissioned in the English pilot individual budgets sites 2006–2008Gearing up for personalisation: training activities commissioned in the English pilot individual budgets sites 2006–2008
www.tandfonline.com [PDF]
… For example the low gearing-low PE portfolio is formed every year on 1 May for nine consecutive years and the average CAR for three years holding period is 21.30 … Journal of Financial Economics, 43: 341–72 … Journal of Finance, 43: 507–22 …

Equity Financing and Gearing in the UK, US, Japan, and IsraelEquity Financing and Gearing in the UK, US, Japan, and Israel
www.jstor.org [PDF]
… For example the low gearing-low PE portfolio is formed every year on 1 May for nine consecutive years and the average CAR for three years holding period is 21.30 … Journal of Financial Economics, 43: 341–72 … Journal of Finance, 43: 507–22 …

Gearing service quality into public and private hospitals in small islandsGearing service quality into public and private hospitals in small islands
www.emerald.com [PDF]
… For example the low gearing-low PE portfolio is formed every year on 1 May for nine consecutive years and the average CAR for three years holding period is 21.30 … Journal of Financial Economics, 43: 341–72 … Journal of Finance, 43: 507–22 …



Q&A About Gearing


What do spur gearing look like ?

Spur gearing resemble

What does gearing also refer to?

Gearing also refers to the ratio between a company's stock price and the price of its warrants.

What do helical gears look like?

Helical gears resemble spiral stairs when seen from above; they have straight teeth but form curved lines when seen from side view."

How many types of gears are there?

There are three types of gears including spur gears(or straight-cut), helical gears(or spiral),and worm gearing(or hypoid).

What does "gear" mean?

Gear refers to a ratio rather than an actual device that transmits power from one object to another. For example, if you are riding your bicycle at 10 miles per hour (16 kilometers per hour) and you downshift into first gear then your bike will travel at 5 miles per hour (8 kilometers per hour). In transmissions with multiple gear ratios such as bicycles, motorcycles, and cars; first gear refers to a ratio rather than an actual device that transmits power from one object to another."

Who may consider gearing when determining whether or not to extend credit?

Lenders may consider gearing when determining whether or not to extend credit. This information can be combined with whether or not the loan will be supported with collateral, as well as if the lender will qualify as a senior lender should the business fail. With this in mind, senior lenders may choose to remove short-term debt obligations when calculating the gearing ratio, as senior lenders receive priority in case of bankruptcy.

What do worm gearing look like?

Worm gearing resemble worms when seen from above; they have curved teeth but form straight lines when seen from side view."

How do lenders determine if they will support loans with collateral?

Lenders may decide how much they are willing to lend based on their own risk tolerance levels and requirements for collateralization. For example, some businesses have assets that can be used as collateral for loans such as real estate holdings or equipment that can be sold at fair market value should there be default on payments due on loans taken out against these assets; however, other businesses do not have any readily available collateral for use in securing loans from creditors so it is more difficult for them obtain financing from banks and other lending institutions without having an extremely high interest rate attached to their loan agreements. In addition, some companies have no assets that can serve as security for borrowing money so they must rely solely upon personal guarantees provided by owners/shareholders who pledge their personal assets (such as homes) if there is default on payments due under loan agreements secured by those same personal guarantees provided by owners/shareholders who pledge their

What is a gear?

A gear is a part having cut teeth or, in the case of cogs, inserted teeth (called i cogs i ), which mesh with another toothed part to transmit torque.

What is gearing?

Gearing refers to the level of a company's debt related to its equity capital, usually expressed in percentage form. It is a measure of a company's financial leverage and shows the extent to which its operations are funded by lenders versus shareholders.