The gearing ratio measures a company’s leverage. Companies are financed through debt, equity, or some form of mezzanine financing.
The gearing ratio is another name for the Debt-to-Equity Ratio. The calculation is the following:
Gearing Ratio = Total Debt / Total Equity
Example Calculation
Company A wants to calculate its gearing ratio as of June 30, 2023. Company A’s balance sheet as of June 30, 2023, shows the following figures:
Total Assets: 100,000
Total Liabilities: 75,000
Common Stock: 1,000
Additional Paid in Capital (APIC): 19,000
Cumulative Retained Earnings: 5,000
The company’s total equity is $25,000 (1,000 + 19,000 + 5,000).
3 = 75,000 / 25,000
Company A’s gearing ratio is 3.