{"id":19352,"date":"2024-08-20T14:00:05","date_gmt":"2024-08-20T13:00:05","guid":{"rendered":"https:\/\/www.sage.com\/en-gb\/blog\/?p=19352"},"modified":"2025-05-07T14:54:03","modified_gmt":"2025-05-07T13:54:03","slug":"what-is-the-gearing-ratio","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-gb\/blog\/what-is-the-gearing-ratio\/","title":{"rendered":"What is the gearing ratio?"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-gb\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tWhat is the gearing ratio?\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2024-08-20T14:00:05+01:00\">20 August, 2024<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"What is the gearing ratio?\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-gb\/blog\/what-is-the-gearing-ratio\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n<div class=\"wp-block-post-author\">\n\t\t\t<div class=\"co-authors\">\n\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-gb\/blog\/author\/kieronjohnson\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2024\/01\/Kieron-Johnson-350x350.jpg\" class=\"entry-author__image\" alt=\"kieron-johnson-profile-picture\" srcset=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2024\/01\/Kieron-Johnson-350x350.jpg 350w, https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2024\/01\/Kieron-Johnson.jpg 600w\" sizes=\"auto, (max-width: 40px) 100vw, 40px\" \/>\t\t\t\t<span class=\"entry-author__name\">Kieron Johnson<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t<\/div>\n\t\t<\/div>\n\n\n\n<p>Financing your business can feel a little like balancing spinning plates.<\/p>\n\n\n\n<p>Picture a circus performer operating at the peak of their powers.<\/p>\n\n\n\n<p>Whenever they&#8217;re intently focused on balancing 1 spinning plate, even for a split second too long, they run the risk of another plate crashing unceremoniously to the ground.<\/p>\n\n\n\n<p>But when they dedicate equal time to balancing each spinning plate, they&#8217;re home and dry (and their trusty plates thank them for it).<\/p>\n\n\n\n<p>Likewise, when you keep close tabs on your company&#8217;s debt and equity levels, you&#8217;re committed to keeping something called the gearing ratio intact, whether you realise it or not.<\/p>\n\n\n\n<p>In this article, we walk you through what gearing is and what it&#8217;s used for, how gearing is calculated and interpreted and how your business can reduce it\u2014increasing your company&#8217;s stability, flexibility, and <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/small-business-financially-fit\/\" target=\"_blank\" rel=\"noopener noreferrer\">financial health<\/a>.<\/p>\n\n\n<?xml encoding=\"utf-8\" ?><div class=\"wp-block-yoast-seo-table-of-contents yoast-table-of-contents\"><ul><li><a href=\"#h-what-is-gearing-and-what-is-it-used-for\" data-level=\"2\">What is gearing and what is it used for?<\/a><\/li><li><a href=\"#h-how-to-calculate-the-gearing-ratio\" data-level=\"2\">How to calculate the gearing ratio<\/a><\/li><li><a href=\"#h-how-to-interpret-the-gearing-ratio\" data-level=\"2\">How to interpret the gearing ratio<\/a><\/li><li><a href=\"#h-how-to-use-the-gearing-ratio-an-example\" data-level=\"2\">How to use the gearing ratio: An example<\/a><\/li><li><a href=\"#h-how-to-reduce-the-gearing-ratio\" data-level=\"2\">How to reduce the gearing ratio<\/a><\/li><li><a href=\"#h-final-thoughts\" data-level=\"2\">Final thoughts<\/a><\/li><\/ul><\/div>\n\n\n<div class=\"single-cta\">\n\t<a\n\t\tclass=\"button button--primary gate-46d869e5-f36b-4b06-8a2c-0ee65a10435b\"\n\t\trole=\"button\"\n\t\tdata-button-location=\"content_area\"\n\t\thref=\"#gate-46d869e5-f36b-4b06-8a2c-0ee65a10435b\"\n\t>Download your free small business toolkit and use the checklists and templates to manage your accounting, payroll and HR business admin with ease<\/a>\n<\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-gearing-and-what-is-it-used-for\">What is gearing and what is it used for?<\/h2>\n\n\n\n<p>Gearing measures a company&#8217;s financial leverage\u2014that is, the proportion of its business funded by borrowed money (debt financing) versus the owner(s) investment or retained earnings (<a href=\"https:\/\/www.sage.com\/en-gb\/blog\/funding-options-grow-your-business\/\" target=\"_blank\" rel=\"noopener noreferrer\">equity financing<\/a>).<\/p>\n\n\n\n<p>Gearing is a useful metric for lenders, investors, and small business owners alike.<\/p>\n\n\n\n<p>It provides insights into a company&#8217;s risk level, which help lenders assess a borrower&#8217;s ability to repay debt.<\/p>\n\n\n\n<p>Gearing also helps investors determine whether to invest in a particular company (or not touch it with a 10-foot pole).<\/p>\n\n\n\n<p>And small business owners can use it to analyse their <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/cash-flow-emergency-business\/\" target=\"_blank\" rel=\"noopener noreferrer\">cash flow<\/a> and decide if they need to reduce their borrowing.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-calculate-the-gearing-ratio\">How to calculate the gearing ratio<\/h2>\n\n\n\n<p>There are a number of ways to work out your gearing, but here are the 3 most commonly used methods.<\/p>\n\n\n\n<p><strong>1. Debt-to-equity ratio <\/strong><\/p>\n\n\n\n<p>The most popular formula is the debt-to-equity ratio, which shows how much debt your company uses to finance the business rather than using its own money.<\/p>\n\n\n\n<p>Take your company&#8217;s total debt\u2014short-term debt plus long-term debt\u2014then divide it by its shareholder equity.<\/p>\n\n\n\n<p>If you prefer the debt-to-equity ratio as a percentage, multiply it by 100.<\/p>\n\n\n\n<p>The formula looks like this:<\/p>\n\n\n\n<p><strong><em>(Short-term debt + long-term debt) \/ shareholder equity<\/em><\/strong><\/p>\n\n\n\n<p><strong>2. Debt ratio <\/strong><\/p>\n\n\n\n<p>Another popular formula is the debt ratio, which measures the proportion of your company&#8217;s assets financed by debt.<\/p>\n\n\n\n<p>Divide your company&#8217;s total debt by its total assets.<\/p>\n\n\n\n<p>Again, if you would like the debt ratio as a percentage, multiply it by 100.<\/p>\n\n\n\n<p>Here&#8217;s the equation:<\/p>\n\n\n\n<p><strong><em>Total debt \/ total assets<\/em><\/strong><\/p>\n\n\n\n<p><strong>3. Equity ratio <\/strong><\/p>\n\n\n\n<p>A third formula is the equity ratio, which is the proportion of your company&#8217;s assets funded by equity.<\/p>\n\n\n\n<p>Divide your company&#8217;s total equity by its total assets.<\/p>\n\n\n\n<p>For an equity ratio expressed as a percentage, multiply it by 100.<\/p>\n\n\n\n<p>This is the calculation:<\/p>\n\n\n\n<p><strong><em>Total equity \/ total assets<\/em><\/strong><\/p>\n\n\n\n<p>Regardless of the gearing formula you use, you&#8217;ll get a good idea of how well your company will be able to satisfy its financial obligations during economic fluctuations.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-interpret-the-gearing-ratio\">How to interpret the gearing ratio<\/h2>\n\n\n\n<p>High gearing (above 0.5 or 50%) means your company has a lot of financial leverage, so it heavily relies on debt to pay for day-to-day operations, which is, quite literally, risky business.<\/p>\n\n\n\n<p>During an economic downturn, your company may have difficulty maintaining its debt repayment schedule, which could, in turn, put it at risk of default and even insolvency.<\/p>\n\n\n\n<p>But not all companies with high gearing are created equal.<\/p>\n\n\n\n<p>For instance, a company with high gearing operating in a capital-intensive sector, such as the car industry, or a regulated sector, such as utilities, isn&#8217;t necessarily in poor financial shape because high gearing is typical in these industries.<\/p>\n\n\n\n<p>Equally, companies with low gearing aren&#8217;t created equal either.<\/p>\n\n\n\n<p>Although low gearing (below 0.25 or 25%) suggests a company is using more equity than debt to finance the business, it can also mean the company can&#8217;t capitalise on debt financing to expand it.<\/p>\n\n\n\n<p>Ideal gearing is between 0.25 (25%) and 0.50 (50%), which indicates a healthy balance between equity and debt financing.<\/p>\n\n\n\n<p>For a more complete picture of your company&#8217;s financial condition, it&#8217;s important to contextualise gearing.<\/p>\n\n\n\n<p>In other words, your company&#8217;s ratio should be benchmarked against the ratios of other companies in the same industry.<\/p>\n\n\n<div class=\"single-cta\">\n\t<a\n\t\tclass=\"button button--primary gate-46d869e5-f36b-4b06-8a2c-0ee65a10435b\"\n\t\trole=\"button\"\n\t\tdata-button-location=\"content_area\"\n\t\thref=\"#gate-46d869e5-f36b-4b06-8a2c-0ee65a10435b\"\n\t>Download your free small business toolkit and use the checklists and templates to manage your accounting, payroll and HR business admin with ease<\/a>\n<\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-use-the-gearing-ratio-an-example\">How to use the gearing ratio: An example<\/h2>\n\n\n\n<p>Let&#8217;s look at how your small business can benefit from calculating its gearing.<\/p>\n\n\n\n<p>For the purposes of this illustration, we&#8217;ll call your fledgling accountancy practice, A-Star Accounting (ASA).<\/p>\n\n\n\n<p>Rumour has it that accountants are flocking in their droves to join ASA, so you&#8217;re hellbent on opening a second location.<\/p>\n\n\n\n<p>But you need more funds to hire staff, buy equipment and lease extra office space.<\/p>\n\n\n\n<p>You can either apply for debt financing, such as a bank loan, equity financing (investment), or both.<\/p>\n\n\n\n<p>By calculating ASA&#8217;s gearing, you evaluate the financial risk attached to securing more debt.<\/p>\n\n\n\n<p>If it&#8217;s high (above 0.5), which indicates heavy debt reliance, you might want to reconsider applying for a bank loan and consider the equity route instead.<\/p>\n\n\n\n<p>But if gearing is less than 0.25, for example, this suggests ASA is less dependent on borrowing to finance the business, which makes taking on additional debt far less risky.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-reduce-the-gearing-ratio\">How to reduce the gearing ratio<\/h2>\n\n\n\n<p>Larry Hartman, Chief Strategic Officer at <a href=\"https:\/\/www.pixelfreestudio.com\/\" target=\"_blank\" rel=\"noopener noreferrer\">PixelFree Studio<\/a>, a software solution company, shares some first-hand experience of reducing his company&#8217;s gearing.<\/p>\n\n\n\n<p>&#8220;In PixelFree&#8217;s growth phase, we focused on equity financing to keep our gearing in a safe range,&#8221; he says.<\/p>\n\n\n\n<p>&#8220;Exploring equity financing options, like getting investors onboard, can help your <a href=\"https:\/\/www.sage.com\/en-gb\/blog\/balance-sheet-use-financial-statement\/\" target=\"_blank\" rel=\"noopener noreferrer\">balance sheet<\/a> without adding to your debt.<\/p>\n\n\n\n<p>&#8220;It certainly helped us grow without taking on too much debt, which is important for long-term success, because it kept our finances stable.&#8221;<\/p>\n\n\n\n<p>Larry recommends companies reinvest profits in the business rather than take out more loans.<\/p>\n\n\n\n<p>&#8220;To do this, cut unnecessary costs and, to make more money, focus on providing goods or services with high margins,&#8221; he says.<\/p>\n\n\n\n<p>Other ways to reduce your gearing include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Paying off long-term debt to reduce interest payments.<br><\/li>\n\n\n\n<li>Refinancing debt to take advantage of lower interest rates or longer repayment terms.<br><\/li>\n\n\n\n<li>Selling non-essential assets to increase cash reserves and pay down more debt.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-final-thoughts\">Final thoughts<\/h2>\n\n\n\n<p>Gearing is a little metric that goes a long way towards letting lenders and investors know the financial health of your company.<\/p>\n\n\n\n<p>It&#8217;s also a big boon for your business analysis.<\/p>\n\n\n\n<p>By keeping a close eye on your gearing, you&#8217;ll not only be better positioned to weather any financial storms that come your way, but you&#8217;ll also be better informed if or when your business sparks any investor interest.<\/p>\n\n\n\n \n<div class=\"single-cta gated-content\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Small business toolkit<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Get your free guide, business plan template and cash flow forecast template to help you manage your business and achieve your goals.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-adbf67e7-f26f-4f58-a954-9e67147b2f85\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Download your free toolkit<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t<div class=\"single-cta__downloads\">\n\t\t\t\t\t\n\t\t\t\t\t4,088 readers have downloaded this guide\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2022\/04\/GettyImages-1282134863-1440x810.jpg\" class=\"single-cta__image\" alt=\"Man working on laptop at desk and looking at business priorities\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2022\/04\/GettyImages-1282134863-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Discover how the gearing ratio affects the ability of your small business to secure funding, investment and manage debt.<\/p>\n","protected":false},"author":1766,"featured_media":19356,"menu_order":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[6],"tags":[135,12],"business_type":[4,3],"lilypad":[],"context":[],"industry":[],"persona":[],"imagine_tag":[],"coauthors":[402],"class_list":["post-19352","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money-matters","tag-business-finances","tag-start-business","business_type-small-business","business_type-medium-sized-business"],"sage_meta":{"region":"en-gb","author_name":"Kieron Johnson","featured_image":"https:\/\/www.sage.com\/en-gb\/blog\/wp-content\/uploads\/sites\/10\/2024\/08\/Woman-calculating-the-gearing-ratio.jpg","imagine_tags":[]},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice UK","distributor_original_site_url":"https:\/\/www.sage.com\/en-gb\/blog","push-errors":false,"_links":{"self":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/posts\/19352","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/users\/1766"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/comments?post=19352"}],"version-history":[{"count":0,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/posts\/19352\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/media\/19356"}],"wp:attachment":[{"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/media?parent=19352"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/categories?post=19352"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/tags?post=19352"},{"taxonomy":"business_type","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/business_type?post=19352"},{"taxonomy":"lilypad","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/lilypad?post=19352"},{"taxonomy":"context","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/context?post=19352"},{"taxonomy":"industry","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/industry?post=19352"},{"taxonomy":"persona","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/persona?post=19352"},{"taxonomy":"imagine_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/imagine_tag?post=19352"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.sage.com\/en-gb\/blog\/api\/wp\/v2\/coauthors?post=19352"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}