What is the Gearing Ratio Formula?
A gearing ratio is a measure of the amount of financial leverage a business has, and indicates the relative proportions of debt and equity in the business. There are a number of gearing ratios including the debt equity ratio and the debt ratio. For example if we use the debt ratio as a measure of the gearing, then the gearing ratio formula can be defined as follows:
- Debt is given in the balance sheet and includes loans, overdrafts, hire purchase and any other borrowings. The bank may include leasing when calculating the gearing ratio as they take a stricter approach.
- Equity is found in the balance sheet and includes amounts invested by the owners and any retained earnings.
For further information on the gearing ratio formula see the Wikipedia definition.
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