Illustrate the meaning of Gearing

Gearing is the relationship between equity anddebt. Debt is typically long term liabilities that the organisation has. Equity is all the share capital and reserves. There are 2 ways that the gearing ratio can be computed are:

• Equity gearing = debt capital vs. equity capital
• Total gearing = debt capital vs. total capital

Equity gearing ratio = (Debt capital/Equity) x 100%

                                    (Capital and reserves)

(100% = same amount of debt and equity)

Total gearing ratio    = (Debt capital/Total capital) x 100%

                                    (Shareholder funds + debt capital)

(50% = same amount of debt and equity)