Q:

What is financial gearing?

A:

Quick Answer

Gearing is a synonym for leverage in finance, and the term is most commonly used in the United Kingdom and Australia. Leverage refers to any ratio or financial indicator that compares the relationship between debt and equity.

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Full Answer

Gearing can be calculated through several financial ratios, including the equity ratio, debt-service ratio and debt-to-equity ratio. As with most financial ratios, the appropriate level of gearing for a company depends on many factors, including size and industry. For example, a debt to equity ratio that shows more debt than equity is almost always a negative sign for a company, but a high ratio may not be out of the ordinary in industries that require more debt, such as heavy equipment manufacturing.

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