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