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
The hunt for water

The most valuable commodity

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

Robert Shiller: why one of the world's smartest economists is worried about the bond market

Merryn Somerset Webb talks to Yale professor and Nobel Prize winner Robert Shiller about how the power of 'stories' drives the global economy and creates financial bubbles.


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.


27 February 1900: The Labour Party is launched

Responding to the need for a single political party to represent the trade unions, the Labour Party was formed on this day in 1900, led by MP Keir Hardie.