Gearing is a financial term that refers to the relationship between a company’s debt and equity. In the UK, gearing is typically expressed as a percentage, with 100% meaning that the company is entirely funded by debt.
Higher percentages indicate a greater proportion of debt, and lower percentages indicate a greater proportion of equity.
Gearing can have both positive and negative effects on a company. On the one hand, high gearing can lead to higher levels of interest payments and put the company at risk of defaulting on its loans. On the other hand, it can also give the company extra firepower to invest and grow. As such, deciding on the right level of gearing is a crucial decision for any business.