Gearing ratio

Gearing ratio measures the proportion of a firm financed by debt relative to equity or total capital, such as the debt-to-equity ratio. High gearing signals greater reliance on borrowing and higher financial risk.

ByHoang TruongUpdated June 30, 2026

FrameworkRatio analysis

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A firm carries €70m of long-term debt alongside €130m of equity, for €200m of total capital. That gives a debt-to-equity ratio of 70/130 = 0.54, or 54%, and a debt-to-capital ratio of 70/200 = 0.35, or 35%. Whether that counts as high gearing depends on the industry — capital-intensive utilities typically run higher than this, technology firms lower.

Where it fits

SubjectCorporate FinanceCoreTopicCapital Structure & LeverageCore

The formula

LaTeX

\frac{D}{E} = \frac{\text{Total debt}}{\text{Total equity}}

Variables

$D$: Total interest-bearing debt (€)
$E$: Total equity (€)

Euros of debt per euro of equity; rises with each additional borrowing.

LaTeX

\frac{D}{D+E}

Variables

$D$: Total interest-bearing debt (€)
$E$: Total equity (€)

Proportion of total capital sourced from debt; bounded between 0 and 1.

LaTeX

\text{Interest cover} = \frac{EBIT}{\text{Interest expense}}

Variables

$E B I T$: Earnings before interest and tax (€)
$I n t er es t e x p e n se$: Annual interest charge (€)

Number of times operating profit covers the interest charge; a higher ratio signals lower financial risk.

Check yourself

PracticeCORE

A firm has long-term debt of €45 million and total equity of €105 million. What is the firm's debt-to-capital gearing ratio, expressed as a percentage?

Select an answer to check your understanding.