Gearing Ratio Formula

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:

Gearing ratio formula = Debt / (Debt + Equity)
  • 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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Last modified August 12th, 2017 by Team

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