Gearing tells you how much of a company runs on borrowed money rather than shareholder capital. Divide total debt by equity and you have the most common version of it. Do that for a utility and a software firm and you'll get numbers so far apart that the ratio looks useless, which is where most explanations stop being helpful.
Two things make this harder than it needs to be. Sources define gearing differently without saying so, and the same company can appear at 0.8 in one report and 44% in another. And traders who meet the term on a broker's site tend to assume it means the same thing as the leverage in their account. It doesn't.
Company debt is negotiated years in advance and nobody can call it in because the share price dropped. Margin works on a much shorter clock.
Key Takeaways
- Gearing shows how much of a company runs on debt rather than shareholder capital
- No single formula exists, so check whether a source used debt to equity, net gearing or debt to capital
- High or low depends on sector: a utility at 100% is normal, a software firm at 100% isn't
- Direction matters more than level, especially when equity is shrinking rather than debt growing
- Company gearing and trading leverage are separate risks, and only one can close your position in hours
What the Gearing Ratio Actually Measures
Gearing tells you how a company funds itself. Debt on one side, shareholder equity on the other, and the ratio between them describes the capital structure.
The logic is simple. Debt is cheaper than equity and doesn't dilute owners, but it comes with fixed obligations. Interest gets paid whether the quarter was good or terrible. Equity carries no such promise. A heavily geared company magnifies returns to shareholders when things go well and magnifies the damage when they don't.
Here's the problem you'll hit within about five minutes of research. Sources define gearing differently and rarely say so. Some treat it as identical to the debt-to-equity ratio. Others use net gearing, which subtracts cash from debt first. Others express it as debt over total capital, giving a percentage rather than a multiple. Loan agreements define it however the lender wants, and there are versions in the wild that exclude intangibles or tax liabilities.
None of these is wrong. They answer slightly different questions. But it means a company described as having 45% gearing in one report and 0.82 gearing in another may be the same company measured two ways. Before comparing anything, check the formula.
Fast Fact
- CCC-rated issuers with bonds maturing in 2027 and 2028 could see their coupons roughly double if they refinance at current yields, according to PIMCO.
The Three Formulas Worth Knowing
Take a company with $400 million of total debt, $50 million of cash and $500 million of shareholder equity.
Debt to Equity
Total debt divided by total equity. Here that's 400 ÷ 500, or 0.8. Every dollar of shareholder capital is matched by 80 cents of borrowing. This is the version most people mean by gearing, and it's the one you'll find on stock screeners.
Net Gearing
Net debt divided by equity, where net debt is total debt minus cash and equivalents. That's (400 − 50) ÷ 500, or 0.7. Subtracting cash makes sense when a company holds a large balance it could theoretically use to repay borrowings.
It also flatters companies sitting on cash they have no intention of spending that way, so treat the difference between the two numbers as information rather than noise.
Debt to Capital
Total debt divided by debt plus equity. That's 400 ÷ 900, or 44%. This version is bounded between 0 and 100%, which makes it easier to compare across companies of different sizes. Rating agencies and lenders lean on it.
Watch the inputs, not just the output. Total debt should include short-term borrowings, the current portion of long-term debt, overdrafts and, under current accounting standards, capitalised lease liabilities. Leases were kept off balance sheets for decades, and their inclusion pushed reported gearing up sharply for retailers and airlines without a dollar of new borrowing.
Equity means shareholders' funds from the balance sheet. Companies with large buybacks or accumulated losses can carry negative equity, which makes the ratio meaningless rather than infinite. When you see a blank or absurd gearing figure on a screener, this is usually why.
Reading the Number: Everything Depends on Sector
There's no universal threshold. Anyone quoting one is either selling something or writing about small businesses.
Regulated Utilities
A regulated utility can run gearing above 100% and be entirely sound. Its revenue is set by a regulator, demand for electricity doesn't collapse in a recession, and its assets are physical and financeable. Lenders price that predictability, so the company can carry debt that would be alarming elsewhere.
Software and Asset-Light Businesses
A software company with the same ratio would worry me. Revenue is contract-dependent, the asset base is largely intangible and hard to pledge, and a bad year can cut cash flow in half. Companies like this typically fund through equity and hold minimal debt, which is why their gearing sits near zero and why a sudden move upward is worth investigating.
Banks and Insurers
Banks and insurers sit in a category of their own. Their business is borrowing and lending, so conventional gearing ratios read as extreme by design and mean something different. Regulatory capital ratios do the work instead.
Property, Telecoms and Infrastructure
These fall in between, usually running elevated gearing supported by long-lived assets and contracted revenue.
The Right Comparison
The useful comparison is always against direct peers and against the company's own history. A number that's stable for six years tells a different story than the same number after climbing from a quarter of its level.
Where Credit Ratings Come In
Rating agencies weigh gearing alongside interest coverage and cash flow when assigning a credit rating. Investment grade broadly means the agency considers default risk low; anything below is high yield debt, sometimes called junk.
The threshold matters commercially. Many institutional mandates cap or prohibit sub-investment-grade holdings, so a downgrade forces selling regardless of what anyone thinks of the business.
What Rising Gearing Tells You
The direction usually matters more than the level.
The Three Ways Gearing Rises
Gearing can rise three ways. The company borrowed more, which may be funding an acquisition or a capital programme and isn't inherently bad. Equity fell, through losses, writedowns or buybacks. Or both happened together, which is the version to look at closely.
Losses are the one to watch. When gearing climbs because equity is shrinking rather than because debt is growing, the ratio is reporting deterioration rather than a financing decision.
Pairing Gearing With Interest Coverage
Pair gearing with interest coverage, which is operating profit divided by interest expense. Gearing shows the size of the obligation; coverage shows whether the company can service it.
A firm with high gearing and coverage of eight times is in better shape than one with moderate gearing and coverage of one and a half. When coverage drops toward two, the margin for a bad quarter is thin.
Debt Covenants
Loan agreements routinely include maximum gearing and minimum coverage tests, checked quarterly. Breaching one can trigger repricing, a demand for repayment, or a renegotiation on the lender's terms.
Companies close to a covenant limit behave differently: capital spending gets deferred, assets get sold, dividends get cut. Covenant terms are disclosed in filings, and they're one of the more useful things to read on a heavily geared company.
Composite Distress Scores
Composite scores like the Altman Z-score bundle gearing with liquidity and profitability into a single distress indicator. They're a screening tool, not a verdict.
Gearing Versus Trading Leverage
Traders conflate these constantly, and the confusion is understandable. Both describe borrowed money amplifying an outcome. Beyond that they behave nothing alike.
Company Gearing
A company negotiates its debt. Terms are agreed in advance, maturities run years out, and pricing is set at issuance or reset on a schedule. Covenants define what would constitute a breach, and even then the usual outcome is a renegotiation rather than immediate repayment.
The important part: no lender can demand repayment because the share price fell. A company's stock can drop 60% while its bonds carry on paying coupons and its facilities stay in place. Market value and debt obligations are largely disconnected in the short run.
This is why a geared company can survive a long stretch of a falling share price, and why gearing tells you about solvency over years rather than what happens next week.
Trading Leverage
Leverage in a trading account is a different mechanism. You post margin, control a larger notional exposure, and the position is marked to market continuously. There's no negotiation, no covenant, no quarterly test.
A move against you reduces your equity in real time, and once it falls below the maintenance requirement you get a margin call. Fail to meet it and positions are closed automatically.
Speed is the real difference. A company might take three years to reach a covenant breach. A leveraged position can go from open to liquidated in an afternoon.
The point isn't that one is riskier. It's that they fail differently. Understanding a company's balance sheet doesn't tell you anything about how much margin you should be using, and a conservative gearing figure on a stock offers no protection to a leveraged position in that stock.
If you're trading with margin, the mechanics of your own exposure deserve at least as much attention as the fundamentals of what you're trading. Our guide to margin and position sizing covers how maintenance levels work in practice.
How a Trader Actually Uses This
Gearing is one input when assessing a stock CFD, not a signal.
Why the Current Environment Weighs More
The current environment gives it more weight than usual. PIMCO's analysis, published in August 2026, estimates that CCC-rated issuers with bonds maturing in 2027 and 2028 could see face-weighted coupons roughly double if they refinanced at today's index yields. The pressure isn't evenly spread. Investment-grade issuers with longer-dated maturities haven't yet refinanced at current rates, while most high-yield issuers already have.
What that means for a geared company is straightforward. Debt raised in 2020 or 2021 at low coupons has to be replaced at whatever the market charges now. For a company with modest borrowings, that's a line item. For one running high gearing on thin coverage, it can consume most of the earnings growth analysts have penciled in.
Three Practical Checks
Look at the maturity schedule rather than the total, since the question is when refinancing happens. Look at the fixed-versus-floating split, because floating-rate borrowers already absorbed the repricing while fixed-rate ones face it at maturity. And look at coverage trend over several years, not one snapshot.
None of this predicts price. Heavily geared stocks outperform for long stretches, and the market prices known balance sheet risk. What gearing gives you is context for why a stock might react sharply to a rate surprise or a credit event when a peer doesn't.
Leverage on Leverage
Leveraged instruments deserve a separate mention. A leveraged ETF or a CFD on a heavily geared company stacks two forms of leverage on each other, one in the instrument and one in the underlying business. The combination is not additive in any intuitive way, and it's worth understanding both before sizing a position.
Risk warning: trading with leverage involves substantial risk of loss and can result in losses exceeding your deposit. Understanding a company's financial position does not reduce the risk of a leveraged trade. Position sizing and margin management are separate matters entirely.
Conclusion
Gearing describes how a company is funded and how much of its future is already committed to lenders. Read it against sector norms and against the company's own history, alongside interest coverage, and check which formula produced the number before comparing anything.
What it won't do is tell you anything about the leverage in your own account. Those risks are unrelated, and only one of them can close your position while you're asleep.
FAQ
What is the gearing ratio formula?
Most commonly total debt divided by shareholders' equity. Net gearing subtracts cash from debt first, and debt to capital divides debt by debt plus equity.
What is a good gearing ratio?
It depends on the sector. Utilities run above 100% comfortably; software companies typically sit near zero. Compare against peers, not a universal number.
Is gearing the same as the debt-to-equity ratio?
Often, but not always. Some sources use net gearing or debt to capital. Check the formula before comparing figures from different places.
What's the difference between gearing and trading leverage?
Company gearing is negotiated, long-term and covenanted. Trading leverage is marked to market continuously and can trigger a margin call within hours.
Does high gearing mean a company is in trouble?
No. It means fixed obligations are large relative to equity. Pair it with interest coverage and the maturity schedule before drawing conclusions.
