ABSTRACT
The proportion of debt relative to equity in a company’s capital structure is known as financial ‘gearing’. The two main ways to measure it are (1) debt ratio (debt ÷ capital employed, or debt ÷ equity), and (2) interest cover (PBIT ÷ interest payable). A company with a high proportion of debt in its capital structure is said to be highly ‘geared’ (or ‘leveraged’). The higher the financial gearing, the greater the risk for equity owners, but the greater their prospect of profit if all goes well.
