What do you understand by Gearing ratio?

Gearing  ratio  is the   ratio of  debt  to equity,That  how  much a company  is finance  by  debt (loans) than  Equity ( Shareholders capital)

A  company  can be  highly geared of  low  geared.A  highly  geared company  is  risky  and they may be  going concern  problems

Gearing ratio is concerned with a company's long term stability, how much the company owes in relation to its size,whether it is getting into heavier debt or improving its situation.

The higher the gearing, the risk of repaying debt and interest. The lower the interest cover,the more pressure there is on profits to fund interest charges.

Hello Team,

A gearing ratio is a financial ratio that compares owner's equity to borrowed funds. Investors sometimes use it to assess how well a company may survive an economic downturn. 

The Relationship Between Financial Leverage and Financial Risk

Financial leverage is the use of borrowed money to increase sales volume, thereby increasing profit. A business owner, for instance, may increase financial leverage with a bank loan that allows him to buy more production machinery. 

Financial risk is a broader term that includes the added risk of default when a company expands using financial leverage, but may also include other forms of risk not directly related to gearing ratios, such as investments in other companies. 

Although financial leverage and financial risk are not one and the same thing, they're related. Measuring the degree to which a company uses one common form of financial leverage -- running a business with borrowed funds -- provides an easily calculated way of assessing a company's financial risk.

Calculating the Gearing Ratio

The gearing ratio is a broad term that describes financial leverage. The term is often used to describe the ratio between the company's debt and shareholder (or owner's) equity. Another related gearing ratio is the long-term debt to total capitalization ratio, which eliminates short-term debt obligations from the equation and substitutes for owner's equity the company's total capitalization, a more volatile financial parameter.  In practice, most discussions of gearing ratios describe the degree of leverage by comparing all company debt to shareholder equity: 

                  Gearing ratio = company debt ÷ shareholder equity

Shareholder equity is the company's book value. In theory, the book value is the present value of all tangible assets, such as its physical plant, land and machinery. Both stockholder equity and company debt can be found in the company's 10-k report, the SEC required annual report to shareholders.

Regards,

Saiyid

Leverage called on any borrowing or the use of financial instruments resulting in amplifying the impact of gains or losses on the investor, often used to describe the ratio of debt to equity in the companies. The higher the debt ratio increased to equity increased leverage on the company's earnings effect. It can also increase the leverage ratio by using other financial instruments such as financial futures and options.

The reason for the use of this term to the similarity of the impact of borrowing on the company's revenues and the modus operandi of the crane to move heavy objects with less effort.

Leverage effect

It seems leverage effect more pronounced in the rate of return on equity and its impact could be limited to three cases:

If the company made a profit and the rate of return on assets (in English: higher than the interest rate paid by the company on its loans, ballooning ROE whenever lifting the company's share capital increased rate.

If the company made a profit and was the rate of return on assets is less than the interest rate you pay on the loan company, fading ROE whenever lifting the company's share capital increased rate.

If the company made losses, losses swells ROE whenever lifting the company's share capital increased rate.

Leverage risk

The most recent two cases, the risks of increased leverage rate in the company, in addition to increasing the company's obligations because of the interest on the loan, the investor presents its profits to fade if not more than the rate of return on assets rate, while in the case of achieving the losses leads uploaded to double the investor losses.

.....thank you for invitation

Agree with Mr Gerorge in his answer

The gearing ratio is a general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.

Also known as the Net Gearing Ratio.

The higher a company's degree of leverage, the more the company is considered risky. As for most ratios, an acceptable level is determined by its comparison to ratios of companies in the same industry. The best known examples of gearing ratios include the debt-to-equity ratio (total debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and debt ratio (total debt / total assets).

A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength.

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I Agree with Mr Shameer Nazir Madari   answers