Gearing ratio definition (2024)

FAQs

What is a gearing ratio in simple terms? ›

The gearing ratio is an indicator of the financial risk associated with a company. If a company has too much debt, it has the potential to fall into financial distress. Remember: A high gearing ratio shows a high proportion of debt to equity, while a low gearing ratio shows the opposite.

The gear ratio (GR) of a gear train is the ratio of the angular speed of the input gear to the angular speed of the output gear. From: Exploring Engineering (Fifth Edition), 2021.

A low gearing ratio is anything below 25% An optimal gearing ratio is anything between 25% and 50%

A high D/E ratio - typically greater than 50% - means the company has a larger proportion of debt than equity, so would not be able to pay down its debt. A normal D/E ratio is usually between 25-50%, it shows a balance of equity and debt which is typical for most companies going through expansionary periods.

Perhaps the most common method to calculate the gearing ratio of a business is by using the debt to equity measure. Simply put, it is the business's debt divided by company equity. Debt to equity ratio = total debt ÷ total equity.

A business with a gearing ratio of more than 50% is traditionally said to be "highly geared". Something between 25% - 50% would be considered normal for a well-established business which is happy to finance its activities using debt.

Here are some key reasons why gear ratios are important: Power and Torque: Different gear ratios provide different levels of power and torque. For example, a lower gear ratio will provide more torque and better acceleration, while a higher gear ratio will provide less torque but better fuel efficiency.

Understanding gear ratios in fishing reels will increase your efficiency on the water and decrease your stress level when faced with a big purchasing decision. The gear ratio of a reel is measured by how many times the spool turns for each single turn of the handle.

Gear ratio calculation involves determining the ratio of the rotational speeds or torques between two intermeshing gears. It helps in understanding the relationship between the sizes and number of teeth on the gears, allowing engineers to design systems with desired speed or torque requirements.

However, gearing ratios are best compared against the industry average. For instance, if an industry has an average gearing ratio of 80%, a company with a 70% ratio can be considered attractive for an investor. In contrast, another company with a ratio of 90% can be considered unattractive.

What is an example of a gear ratio? ›

The calculation uses the number of teeth in the ring gear and divides it by the number of teeth in the pinion gear to provide you with a “[result] to 1” ratio. For example, if the pinion gear has 41 teeth, and the ring gear has 11 teeth, the ratio would be calculated as 41/11, which is equal to 3.73 = 3.73:1.

Comparison tool

For example, a company with a gearing ratio of 60% may be perceived as high risk. But if its main competitor shows a 70% gearing ratio, against an industry average of 80%, the company with a 60% ratio is, by comparison, performing optimally.

Q: Can a gearing ratio be over 100? A: Yes - the usual way to provide steep gear ratios is this: the worm and gear.

Gearing Ratio = 1,000,000 / 2,000,000 = 0.5 or 50% This means that the company has a gearing ratio of 50%, which indicates that it has more debt than equity.

Simply put, it is the business's debt divided by company equity. The debt to equity ratio can be converted into a percentage by multiplying the fraction by 100. This is perhaps an easier way to understand the gearing of a company and is generally common practice.

Gear ratios can be boiled down to a single statement: Higher ratios (with a lower numerical value) give better torque/acceleration and lower ratios allow for higher top speeds and better fuel economy. Higher ratios mean the engine has to run faster to achieve a given speed.