Gearing

Gearing (or leverage) is the relationship between the debt and the equity in a business – between borrowed money and shareholders’ money. A company with £300,000 total debt and £300,000 of shareholders equity is 50% geared (300/600).

For a company to be highly geared – that is, for it to have borrowed a large amount of money relative to its shareholders’ funds – is not necessarily a bad thing. As long as the return on the borrowed money is greater than the interest payable on it, the shareholders will benefit.

But just as gearing can amplify profits in good times, it can exaggerate losses in bad times – interest on debt has to be paid back regardless of how well or badly a company performs. Geared or leveraged takeovers occur when a takeover bid is made using a high proportion of borrowed money.

• See Tim Bennett’s video tutorial: Three ways leverage can boost your returns.

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


21 November 1969: The first permanent Arpanet link

A milestone in the formation of the internet, the first permanent Arpanet link was established on this day in 1969 between researchers in the United States.