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.
Key Takeaways:
Gearing ratios are a group of financial metrics that compare shareholders' equity to company debt in various ways to assess the company's amount of leverage and financial stability.
Gearing is a measure of how much of a company's operations are funded using debt versus the funding received from shareholders as equity.
Gearing ratios have more meaning when they are compared against the gearing ratios of other companies in the same industry.
A higher gearing ratio indicates that a company has a higher degree of financial leverage and is more susceptible to downturns in the economy and the business cycle. This is 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, while companies with lower gearing ratio calculations have more equity to rely on for financing.
Gearing ratios are useful for both internal and external parties. Financial institutions use gearing ratio calculations when deciding whether to issue loans. In addition, loan agreements may require companies to operate with specified guidelines regarding acceptable gearing ratio calculations. Alternatively, internal management uses gearing ratios to analyze future cash flows and leverage.
Interpreting Gearing Ratios
A high gearing ratio typically indicates a high degree of leverage, although this does not always indicate a company is in poor financial condition. Instead, 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 as they can operate with higher levels of debt. In addition, companies in monopolistic situations often operate with higher gearing ratios as their strategic marketing position puts them at a lower risk of default. Finally, industries that use expensive fixed assets typically have higher gearing ratios, as these fixed assets are often financed with debt.
A firm's gearing ratio should be compared with the rations of other companies in the same industry.
Example of How to Use Gearing Ratios
Assume that a company has a debt ratio of 0.6. Although this figure alone provides some information as to the company’s financial structure, it is more meaningful to benchmark this figure against another company in the same industry.
For instance, assume the company's debt ratio last year was 0.3, the industry average is 0.8, and the company’s main competitor has a debt ratio of 0.9. More information is derived from the use of comparing gearing ratios to each other. When the industry average ratio result is 0.8, and the competition's gearing ratio result is 0.9, a company with a 0.3 ratio is, comparatively, performing well in its industry.
A gearing ratio is a general classification describing a financial ratio that compares some form of owner equity (or capital) to funds borrowed by the company. Net gearing is the most common type of gearing ratio and is calculated by dividing the total debt by the total shareholders' equity.
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.
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.
The company's operational gearing ratio can be calculated in a couple of different ways: You can divide its contribution by its operating profit. Or you can take a company's operating profit, add its fixed costs to that number and then divide the resulting number by its operating profit. You will get the same answer.
Divide the number of driven gear teeth by the number of drive gear teeth. In our example, it's 28/21 or 4 : 3. This gear ratio shows that the smaller driver gear must turn 1,3 times to get the larger driven gear to make one complete turn.
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.
The gear ratio gives us an idea of how much an output gear is sped up or slowed down or how much torque is lost or gained in a system. We equipped this calculator with the gear ratio equation and the gear reduction equation so you can quickly determine the gear ratio of your gears.
Count all the teeth on the pinion gear and the ring gear.Once you have those two numbers, divide the number of teeth that are on the ring gear by the number of teeth that are on the pinion gear and BAM–you have your gear ratio!
If you are comparing one data point (A) to another data point (B), your formula would be A/B. This means you are dividing information A by information B. For example, if A is five and B is 10, your ratio will be 5/10. Solve the equation. Divide data A by data B to find your ratio.
35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.
Gross Gearing, or Debt to Equity, is a measure of a company's financial leverage. It is calculated by dividing its total liabilities by stockholders' equity. This is measured using the most recent balance sheet available, whether interim or end of year and includes the effect of intangibles.
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.
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.
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.
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