Gearing ratio: definition, formula and healthy range

Published Monday 26 October 2026

Table of contents

• What is a gearing ratio?
• Types of gearing ratios
• How to calculate gearing ratio
• What is a good gearing ratio?
• Why gearing ratio matters for small businesses
• Manage your business finances with Xero
• FAQs on gearing ratio

Key takeaways

• Calculate your gearing ratio by dividing total debt by shareholders’ equity and multiplying by 100 to measure how much your business relies on borrowing.
• Aim for a gearing ratio between 25%–50% to balance growth potential with financial stability.
• Monitor your ratio regularly to spot warning signs before they affect loan applications or cash flow.
• Improve a high gearing ratio by paying down debt, retaining profits, or bringing in equity investment.

What is a gearing ratio?

Gearing ratio is a financial metric that measures how much of your business is funded by borrowed money compared to owner investment. It shows the balance between debt and equity on your balance sheet.

Lenders and investors use this ratio to assess risk. A business with high gearing relies heavily on debt, which means higher interest payments and more financial pressure during slow periods. A business with low gearing has more equity cushion but may be missing growth opportunities.

For small business owners, your gearing ratio matters most when you’re:

• applying for a loan: lenders check this ratio to decide if you can handle more debt
• planning expansion: it helps you understand how much borrowing room you have
• reviewing financial health: it flags whether your debt levels are sustainable
• talking to investors: it shows how much risk you’re carrying

Your gearing ratio is expressed as a percentage or decimal. A ratio of 100% (or 1.0) means your business has equal amounts of debt and equity funding.

Types of gearing ratios

There are several ways to measure gearing, and different lenders may ask for different calculations. Understanding the main types helps you prepare the right figures and speak confidently about your financial position.

Debt-to-equity ratio

The debt-to-equity ratio is the most common gearing measure. It compares what you owe to what you own.

Formula: Total debt ÷ Shareholders’ equity

This ratio tells you how many dollars of debt you have for every dollar of equity. For example, a ratio of 0.42 means that for every dollar in equity, the business has 42 cents of debt.

A result of 1.0 means equal debt and equity. It’s the gearing calculation you’ll see used most often.

Debt ratio

The debt ratio shows what percentage of your total assets is funded by debt.

Formula: Total debt ÷ Total assets

This gives you a broader view of borrowing across your entire balance sheet. A debt ratio of 0.4 means 40% of your assets are financed through borrowing.

Equity ratio

The equity ratio measures the opposite: how much of your business is funded by owner investment.

Formula: Shareholders’ equity ÷ Total assets

A higher equity ratio indicates lower financial risk. This calculation is useful when you want to emphasise stability rather than debt levels.

Net gearing ratio

The net gearing ratio subtracts your cash from your total debt before comparing it to equity. It accounts for cash your business could use to pay down borrowings straight away.

Formula: (Total debt – Cash) ÷ Shareholders’ equity × 100

For example, a business with HK$1.2m of debt, HK$300,000 in cash and HK$2m of equity calculates (HK$1.2m – HK$300,000) ÷ HK$2m = 45%. That’s lower than its 60% debt-to-equity ratio because the cash offsets part of the debt.

How to calculate gearing ratio

Gearing ratio = total debt ÷ shareholders’ equity × 100. Take your total borrowings from the balance sheet, divide them by shareholders’ equity, then multiply by 100 to get a percentage. A result of 60% means your business carries HK$0.60 of debt for every HK$1 of equity.

You’ll find both figures on your balance sheet. Follow these steps:

1. Find total borrowings on the balance sheet (this includes loans, credit lines, and other borrowings)
2. Find shareholders’ equity (total assets minus total liabilities)
3. Divide total borrowings by shareholders’ equity
4. Multiply by 100 to express as a percentage

Example: calculating gearing ratio for a small business

Sam runs a coffee shop with the following balance sheet figures:

• Total debt: HK$1.2m (business loan plus equipment finance)
• Shareholders’ equity: HK$2m (initial investment plus retained profits)

Calculation: HK$1.2m ÷ HK$2m = 0.6 × 100 = 60%

Sam’s gearing ratio of 60% means the business has HK$0.60 of debt for every HK$1 of equity. This sits slightly above the typical “healthy” range, which may prompt Sam to focus on paying down debt before taking on new borrowing.

What is a good gearing ratio?

A good gearing ratio typically falls between 25%–50%. This range is considered optimal for established businesses because it suggests a healthy balance between using debt to grow and maintaining financial stability.

Here’s what different ranges generally indicate:

• Below 25%: low gearing means conservative financing with minimal debt risk, but you may be missing growth opportunities that strategic borrowing could fund
• 25%–50%: moderate gearing suggests a balanced approach where you’re using debt productively without overextending
• 50%–75%: higher gearing indicates significant reliance on debt, which increases risk during downturns but may be acceptable for capital-intensive industries
• Above 75%: high gearing signals potential financial stress. Ratios above 50% already leave a business more vulnerable to loan defaults and bankruptcy, and the risk grows as gearing climbs. It can also make it harder to secure new loans or survive cash flow disruptions

What counts as ‘good’ also depends on your industry. Capital-intensive sectors like manufacturing or property typically carry higher gearing than service businesses with fewer assets. Industries that need major capital investment and have steady, predictable cash flows can often justify higher gearing. A 60% ratio might concern a lender evaluating a consulting firm but seem reasonable for a construction company.

Lenders also consider trends. A ratio that’s improving over time looks better than one that’s climbing, even if the current number is similar.

Hong Kong banks set their own lending criteria, so there’s no single regulatory cut-off for gearing. When you apply for credit as a small or medium-sized enterprise (SME), a bank will usually review the debt on your balance sheet alongside your cash flow. Loan agreements may also include covenants that cap how much debt you can carry.

Guarantee schemes can make it easier to borrow. The Hong Kong Mortgage Corporation’s SME Financing Guarantee Scheme provides guarantees that can help SMEs obtain bank loans. The Hong Kong Monetary Authority (HKMA) also outlines its work with banks to support SMEs.

Before you approach a bank, compare your debt and equity financing options to see which suits your gearing position.

Why gearing ratio matters for small businesses

Your gearing ratio directly affects your ability to borrow, grow and weather tough times.

• Loan applications: banks and lenders check your gearing ratio before approving credit. A ratio above their threshold may result in rejection or higher interest rates. Knowing your number before you apply helps you either improve it or choose the right time to borrow.
• Growth decisions: when you’re considering expansion, your gearing ratio shows how much borrowing capacity you have. Taking on debt when you’re already highly geared increases risk. Understanding your current position helps you decide whether to fund growth through loans, retained profits, or new investment.
• Cash flow pressure: higher gearing means higher interest payments. During slow periods, these fixed costs don’t shrink with your revenue. A lower gearing ratio gives you more breathing room when cash is tight.
• Investor confidence: if you’re seeking investment, your gearing ratio signals how much risk you’re already carrying. Investors may be reluctant to put money into a business that’s heavily indebted.
• Early warning system: tracking your ratio over time helps you spot problems before they become serious. A steadily rising gearing ratio suggests you’re relying more on debt, which may need attention.

Manage your business finances with Xero

Keeping track of your gearing ratio is easier when your financial data is accurate and up to date. Xero’s cloud-based accounting software gives you real-time visibility into your debt levels, equity position, and overall financial health.

With Xero, you can pull balance sheet reports whenever you need them. Track how your ratio changes over time. Share clear financial snapshots with lenders or advisors. Automated bank feeds that reconcile transactions mean your numbers stay current without manual data entry.

Ready to take control of your business finances? Get one month free and see how Xero helps you make confident decisions about borrowing, growth, and financial stability.

FAQs on gearing ratio

Here are answers to common questions about gearing ratios for small businesses.

What is the difference between gearing ratio and debt-to-equity ratio?

Gearing ratio is the umbrella term for measures of how much a business relies on debt, and debt-to-equity is the most common one, so many lenders use the two terms interchangeably. Other gearing measures, such as the debt ratio and net gearing ratio, use different inputs like total assets or cash.

Is a high or low gearing ratio better?

Neither is universally better. Low gearing (below 25%) means less financial risk but may limit growth. High gearing (above 50%) allows faster expansion but increases vulnerability during downturns. Most small businesses aim for moderate gearing between 25%–50%.

Is a high gearing ratio bad?

A high gearing ratio can be manageable when your industry and cash flow support it and the ratio is trending down. It does raise your interest costs and your risk if trading slows.

Is 50% gearing considered high?

A 50% gearing ratio sits at the upper end of the moderate range. Ratios between 25%–50% are commonly described as healthy. Above 50% is generally considered high gearing, though acceptable levels vary by industry.

What does a gearing ratio of 60% mean?

A 60% gearing ratio means your business has HK$0.60 of debt for every HK$1 of equity. This indicates higher-than-average reliance on borrowed money, which may make lenders cautious and increases your interest payment burden.

How can I improve my gearing ratio?

You can lower your gearing ratio by paying down existing debt, retaining more profits in the business instead of withdrawing them, or bringing in additional equity investment. Avoid taking on new debt until your ratio reaches a healthier level.