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Definition of



relationship between firm’s borrowings and stockholders’ funds the relationship between a company's borrowings (which includes both prior charge capital and long-term debt) and its stockholders' funds (common share capital plus reserves). Gearing calculations can be made in a number of ways, and may be based on capital values or on earnings/interest relationships. Overdrafts and interest paid thereon may also be included:

Profit before interest and tax / Profit before tax

shows the effect of interest on the operating profit.

Profit before interest and tax / Interest expense

shows the number of times that profit will cover interest expense.

Total long-term debt / Shareholders' funds + long-term debt

shows the proportion of long-term financing which is being supplied by debt.

Total long-term debt / Total assets

a measure of the capacity to redeem debt obligations by the sale of assets.

Operating cash flows − Taxation paid − Returns on investment and servicing of finance / Repayments of debt due within one year

measures ability to redeem debt.

A company with a high proportion of prior charge capital to shareholders' funds is high geared, and is low geared if the reverse situation applies.

Related definitions of "gearing"

Definitions of ’gearing’ and meaning of ’gearing’ are from the book publication, QFINANCE – The Ultimate Resource, © 2009 Bloomsbury Information Ltd. Find definitions for ’gearing’ and other financial terms with our online QFINANCE Financial Dictionary.

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