Gearing Ratio

It’s a ratio that indicates the extent to which a company is dependent upon external finance (ie not shareholders’ finance)

In times of plenty a fixed interest loan is often seen as a good thing because the funding is helping to achieve super profits but is costing the company only a fixed amount of interest. Effectively using other people’s money to generate profits for yourself.

However, in times of hardship, fixed interest borrowing can represent a heavy burden on a company and the interest can represent a disproportionate percentage of the pre-tax profits

Ok?

Depends upon your degree of self confidence – if you think that you could earn at a rate faster than the rate of interest you have to pay then a high gearing ratio is good