Gearing

In plain terms

Gearing tells you how much of a business is funded by borrowed money compared with the owners' own capital. A highly geared business leans heavily on debt; a low-geared one is funded mostly by equity and retained profit. It's one of the quickest reads a lender takes on financial risk.

The logic is intuitive. Debt has to be serviced whatever the weather — interest is due in a good month and a bad one alike. The more debt a business carries relative to its equity cushion, the less room it has to absorb a downturn before repayments become a strain. Gearing puts a number on that exposure.

How it's calculated

The most common version is the debt-to-equity ratio:

Gearing = Total debt ÷ Shareholders' equity × 100

A business with £200,000 of debt and £400,000 of equity is geared at 50%. Double the debt to £400,000 and gearing hits 100% — debt and equity are equal. Some analysts instead use debt ÷ (debt + equity) to express debt as a share of total funding, so always check which formula is being quoted before comparing two businesses.

Why it matters to your business

Lenders watch gearing because it signals how much further you can safely borrow. Low gearing suggests headroom and resilience, and usually makes new finance easier and cheaper to secure. High gearing flags that repayments already consume a lot of capacity, so a lender may lend less, charge more, or decline.

For you, gearing is also a planning tool. A modest amount of debt can be healthy — it funds growth without diluting ownership, a concept related to leverage. The risk is overshooting: too much debt magnifies losses as readily as gains. Reading gearing alongside interest cover shows not just how much you owe, but how comfortably you can service it.

What level of gearing is healthy?

There's no universal answer — it's heavily sector-dependent:

• Below ~50% is often viewed as low gearing, signalling caution and capacity.
• 50–100% is common and unremarkable for many trading businesses.
• Above ~100% is high gearing and tends to draw closer lender scrutiny.

Asset-heavy, stable-cashflow businesses such as property or utilities comfortably carry far more debt than a volatile, early-stage company. What matters most is whether the cash flow reliably covers the repayments — see our cash-flow management guide for the practical side.