Gearing ratio
Gearing measures the use of debt finance relative to equity or total long-term finance. Common formulas are debt ÷ equity × 100% and debt ÷ (debt + equity) × 100%. Definitions of debt also vary, especially for preference shares and short-term borrowing. State the formula and use the convention given in the question. Higher gearing commonly increases finance commitments and shareholder risk.
Worked example
Debt of $40,000 and equity of $60,000 give 66.7% debt-to-equity gearing, or 40% debt-to-total-capital gearing.
Common mistake
These are different expressions of the same financing structure; do not compare their percentages as though they used one formula.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | K1 | Direct | July 2027–August 2028 |
| CIMA | BA3 | Direct | Official assessment-window verification pending |
| CIMA | F2 | Direct | Official assessment-window verification pending |
| FIA | FFA | Direct | September 2026–June 2027 |