measures the percentage of capital employed that is financed by debt and long term financing. The higher the gearingthe higher the dependence on borrowing and long term financing. Whereasthe lower the gearing ratiothe higher the dependence on equity financing. Traditionallythe higher the level of gearingthe higher the level of financial risk due to the increased volatility of profits. Financial manager face a difficult dilemma. Most businesses require long term debt in order to finance growthas equity financing is rarely sufficienton the other handthe introduction of debt and gearing increases financial risk. A high gearing ratio is positive; a large amount of debt will give higher return on capital employed but the company dependent on equity financing alone is unable to sustain growth. Gearing can be quite high for small businesses trying to become establishedbut in general they should not be higher than 50%. Shareholders benefit from gearing to the extent that return on the borrowed money exceeds the interest cost so that the market value of their shares rise.

This definition is in context to Accounting. See more contextual defintions for Gearing Ratio.