Glossary

Gearing

Gearing (or leverage) is the relationship between the debt and the equity in a business - between borrowed money and shareholders' money.

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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 also: Leverage

Advertisement
Advertisement - Article continues below
Advertisement

Most Popular

Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020