Gearing ratio

Definition

The gearing ratio = debt ÷ equity (or debt ÷ debt + equity). A highly geared business is funded largely by debt, which magnifies both returns and losses, and must be serviced whatever happens.

In plain terms

It is how much of the business is built on borrowed money versus the owners' own stake. More debt means more risk if trading dips.

Why it matters for your company

Lenders watch gearing as a resilience signal. Keep it moderate, and pair it with healthy interest cover. Use the gearing ratio calculator.

In practice

For a typical UK limited company, gearing shifts through the ordinary business cycle rather than sitting still. A director financing a growth push with a loan or a credit facility will see gearing climb temporarily, then ease back down as retained profit builds up equity and the debt is repaid. The number on its own says little without that context — a snapshot mid-expansion looks different from the same business a year later once trading has caught up.

What matters in practice is the trend and the reason behind it. Gearing rising because a company borrowed to fund a specific, well-understood opportunity reads very differently to gearing rising because losses have eroded equity while debt stayed constant. Directors who track gearing alongside their management accounts tend to spot the difference early, rather than being surprised by it at year end.

How lenders read it

Lenders rarely look at gearing in isolation. They read it alongside the shape of the debt itself — its term, its cost profile, and whether it is secured — plus the underlying trading performance. A company with elevated gearing but consistent, well-evidenced cash generation and manageable interest cover can present a very different risk picture to one with the same ratio but thin, patchy cash flow.

Direction of travel matters as much as the level itself. A gearing ratio that is stable or improving tends to be viewed more favourably than one moving sharply in either direction, since sudden swings prompt questions about what changed and why. Directors preparing for a funding conversation generally do well to be ready to explain both the current position and the story behind how it got there, rather than treating the ratio as a single pass-or-fail test.