Gearing

Gearing
Financial leverage. The New York Times Financial Glossary

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gearing gear‧ing [ˈgɪərɪŋ ǁ ˈgɪr-] also ˌcapital ˈgearing noun [uncountable] FINANCE
the amount of borrowing that a company has in relation to its share capital. If the company makes more profit by investing this borrowed money in its business activities than it pays to lenders in interest, the company's shareholders will obtain higher dividend S (= payments from their shares) than they would without the use of borrowed money. But if the company makes less profit by investing this borrowed money in its business activities than it pays to lenders in interest, dividends will be lower, so high gearing involves a higher degree of risk; = LEVERAGE:

• The company has cut gearing to between 40% and 50% from approximately 80% over the past two years.

• We have a target - to lower our gearing to the 1:1 level.

• With higher levels of capital gearing, debt service payments stood at record levels.

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   1 The ratio of a company's debt to equity. Gearing is an indicator of a company's ability to service its debt. A company with a high proportion of debt to equity (high gearing) is more vulnerable to fluctuations in business activity. It therefore represents higher risk for equity holders and offers greater return. Whether gearing is acceptable or not is often judged by comparisons with companies in similar industries or sectors.
   2 In derivatives markets, gearing is the measure of the amount of cash spent purchasing an option or a futures contract, compared to the actual value of the underlying position. The more highly geared the trading position, the greater the risk that a small change in market prices will completely wipe out the cash investment. That also means that a small change in market prices in the right direction can produce large profits in relation to the size of the cash investment. Gearing is also known as leverage.
   ► See also Derivatives.

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gearing UK US /ˈgɪərɪŋ/ noun [U] (UK FINANCE
► the amount of money a company has borrowed compared to its share capital: »

You must look at the company's gearing level and its ability to service its debt.


Financial and business terms. 2012.

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Look at other dictionaries:

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