How to use Gearing Ratios - Total debt/Net worth & Equity gearing

Key Note Company Reports contain Gearing Ratios for all UK companies which provide relevant accounting data to Companies House. These Ratios are also provided in our Benchmarking Reports for a Market, where we list down the main companies active in a market area and give there financial data and ratios for comparison.

A guide on what Gearing Ratios are and how to use them is given below

Total debt/net worth

The level of outstanding loans to be paid by the company, excluding those necessary to meet current liabilities.
Total debt x 100 / Net worth

(Net worth is expressed as the value of a firm to its owners as shown on the balance sheet. It is the sum of total capital and reserves less intangible assets).
The lower the percentage in most cases the better. This indicates that a company has less debt therefore making the possibility of bankruptcy less likely. If the percentage is low, it indicates that most of the business is financed by investors or retained earnings. If the ratio is high, much of the business is financed by lenders. In some cases a higher reading could mean that a company is expanding and this expansion is financed through borrowing which in turn could lead to more sales therefore increasing shareholder wealth. Some lenders may refuse borrowing to companies with high debts as they are considered more risky. The value of this reading is very depended on industry.

Equity gearing

The proportion of the total liabilities that are covered by shareholders funds.

Total capital and reserves x 100 / Total liabilities

The greater the proportion of equity to total liabilities or borrowings the better. Indicates how financially strong a company is.
The lower the debt the better as it shows that the company is less risky. Comparison is more accurate if done by industry as it gives a clearer view.