Gearing ratio of company
1 answersQuestion asked ( August 19, 2009 , Shopping / Finance )
How can “gearing ratio” of a company be used to understand company’s financial state of affairs. Is it an effective measure?
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Answer
Gearing ratio is a financial ratio used to compare a company’s capital position. It compares in the equity in a company with the debt / borrowings of the company to understand how well the company has leveraged its capital. In simple words, it helps understand how much of the business activities is managed on equity vs. debt capital. A typical gearing ratio is a debt – equity ratio. Please note that though in general it is perceived that a higher gearing ratio means greater the risk, the level of gearing ratio should be compared to the industry averages in which the company operates to better use it as an effective measure
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