The concept explains how organisations can use gearing, or financial leverage to manage their growth strategies. It describes the advantages and risks of different levels of financial leverage, and provides step by step guidance on how to calculate the gearing ratio.
Gearing Ratio Definition
The gearing ratio, also known as financial leverage ratio and capitalisation ratio, is the proportion of a company's debt to its equity: that which carries a fixed rate of dividend or interest, and that which does not carry a fixed rate of dividend or interest. The gearing ratio bears similarities to the debt to equity ratio, although some variations between the two yield different results (Kuppapally, 2008).
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- Arnold, G. (2008) Corporate Financial Management, Pearson Education, Essex, UK.
- Baker, H. K. and Powell, G. (2005) Understanding Financial Management, Blackwell Publishing, Malden, MA.
- CIMA (2005) CIMA Official Terminology, The Chartered Institute of Management Accountants, Oxford, UK.
- CIMA (2008) Management Accounting Financial Strategy, CIMA Publishing, Oxford, UK.
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