Where do you see this ?
In analyst reports and company financial statement.
What does it mean?
Gearing or gearing ratio, describes the ratio between a company’s borrowed funds and its capital or assets.
It is a measure of leverage, or the degree in which a company is replying on borrowed money to fund its operations.
There are several gearing ratios used, such as the debt to equity ratio (total debt/total equity) and debt ratio (total debt/total assets). Gearing provides an important indication of how risky a company is from the point of view of investors.
The higher the gearing ratio, the more risk the company is exposed to.
In an economic downturn, for instance, the company will have to continue servicing its debts even when business declines.
Banks may not allow a company to refinance or roll over its debts if financial conditions are poor. This will cause a credit crunch for the company if its gearing is too high and if it cannot find alternative sources of funding.
Why is it important ?
Gearing ratios are particularly important when analysing real estate investment trusts (Reits). These vehicles fund their property purchases with large amounts of debt.
If the gearing ratio exceeds certain limits, Reits may need to raise extra funds from unitholders by selling more shares to existing shareholders through rights issues.
So you want to use the term. Just say…
“I’m going to carefully study the gearing of this Reit, before deciding whether to invest.”
Invest, The Sunday Times, Pg 32 May 6, 2012