Gearing Ratio

The gearing ratio, also known as the leverage ratio, is a measure of a company's financial leverage. It is calculated by dividing a company's total debt by its equity. A high gearing ratio indicates that a company is using a large amount of debt to finance its operations. This can be risky, as it means that the company is more vulnerable to interest rate changes and economic downturns. However, a high gearing ratio can also be beneficial, as it can allow a company to grow more quickly by using borrowed money.

The gearing ratio is important for investors to consider when evaluating a company's financial health. A high gearing ratio can be a sign of financial distress, as it means that the company is struggling to meet its debt obligations. However, a low gearing ratio does not necessarily indicate that a company is financially healthy. A company with a low gearing ratio may simply be conservative in its financial management.

The gearing ratio is also used to calculate a company's interest coverage ratio. The interest coverage ratio is a measure of a company's ability to pay its interest expenses. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses. A high interest coverage ratio indicates that a company is able to easily meet its interest obligations.

The gearing ratio is a useful tool for investors and analysts to evaluate a company's financial health. However, it is important to remember that the gearing ratio is just one of many factors that should be considered when making an investment decision.

In addition to the gearing ratio, there are a number of other financial ratios that can be used to evaluate a company's financial health. These ratios include the debt-to-equity ratio, the current ratio, and the quick ratio. By considering all of these ratios, investors and analysts can get a more complete picture of a company's financial situation.