Gearing ratio: definition, types and how to calculate

Published Tuesday 6 October 2026

Table of contents

• Gearing ratio definition
• Why does your gearing ratio matter?
• Types of gearing ratios
• Debt-to-equity ratio vs gearing ratio
• How to calculate the gearing ratio
• Example gearing ratio calculations
• When to use the debt-to-equity ratio vs the gearing ratio
• Gearing ratio analysis
• Manage your finances with Xero
• FAQs on gearing ratio

Key takeaways

• A gearing ratio compares your business’s debt with its equity. Debt-to-equity (total debt ÷ total equity × 100) is the most common version.
• As a rule of thumb, below 25% is low gearing, 25–50% is moderate and often seen as optimal, and above 50% is high. These bands vary by industry.
• The same business can show different results on different formulas. Always state whether you’re using debt-to-equity, debt-to-capital or net gearing.
• You can bring a high ratio down by paying off debt and keeping more profit in the business. Borrow when the debt clearly supports growth.

Gearing ratio definition

A gearing ratio compares your business’s debt with its equity. It shows how much of your business runs on borrowed money compared with money the owners have put in or kept in the business.

Gearing is an umbrella term for a family of ratios, including debt-to-equity, debt-to-capital and net gearing. Each one uses two building blocks:

• Debt: borrowed money, such as bank loans and credit lines, that you repay with interest
• Equity: the owners’ stake in the business, made up of share capital and retained earnings

Think of it like buying a home. A small deposit and a big mortgage means high gearing, while a large deposit keeps gearing low.

The equity figure on your balance sheet is close to your business’s net worth: what’s left after you subtract liabilities from assets. Lenders and investors compare your debt with that figure as a quick signal of risk.

A higher ratio means heavier reliance on debt, which can lift returns when sales are strong and squeeze cash flow when they dip. A lower ratio means a stronger equity base with less risk, though growth may be slower.

Why does your gearing ratio matter?

Your gearing ratio is a snapshot of your business’s solvency, meaning its ability to meet long-term debts. Tracking it helps you plan borrowing and growth with more confidence:

• Borrowing decisions: judge whether you can take on more debt without straining cash flow
• Lender reviews: give funders a clear picture of your finances, since lenders often review gearing when they assess a loan
• Strategic planning: match your mix of debt and equity to your goals, whether that’s fast expansion or steady growth
• Cash flow stability: free up cash for reinvestment with a lower ratio, or set aside more for repayments with a higher one
• Risk management: spot pressure early by reviewing your ratio regularly

Types of gearing ratios

Several ratios measure how your business is funded, and each answers a slightly different question. Here are the ones you’re most likely to see:

• Debt-to-equity ratio: compares total debt with total equity, showing how much creditors fund compared with owners
• Debt-to-capital ratio: shows the share of total capital (debt plus equity) that comes from borrowing
• Net gearing ratio: subtracts cash from debt before comparing it with equity, showing the debt left after using your cash
• Equity ratio: shows the share of total assets funded by equity, where a higher figure signals more stability
• Times interest earned (TIE) ratio: measures how easily earnings before interest and tax cover your interest payments

Debt-to-equity ratio vs gearing ratio

People often use these terms interchangeably, but debt-to-equity is one type of gearing ratio. Gearing is the umbrella term that also covers debt-to-capital and net gearing.

Debt-to-equity divides total debt by total equity, counting both short-term and long-term borrowing. When someone quotes a gearing ratio without naming the formula, they usually mean debt-to-equity, so check before you compare figures.

How to calculate the gearing ratio

The most common gearing ratio formula is debt-to-equity: divide total debt by total equity, then multiply by 100 to get a percentage. Written out, gearing ratio = total debt ÷ total equity × 100. If you leave out the × 100, the result is a decimal, so 0.5 and 50% mean the same thing.

Follow these steps to work out your own figure.

1. Find your total debt

Add up all your interest-bearing borrowings, such as bank loans, overdrafts, credit lines and lease liabilities. You’ll find them under liabilities on your balance sheet, so include both short-term and long-term amounts. If you plan to use net gearing, also note your cash, which sits under current assets.

2. Find your total equity

Add your share capital and retained earnings to get your owner’s equity. Both sit under equity on your balance sheet, and together they’re the value that belongs to you and any other owners once all liabilities are paid. Take every figure from the same balance sheet date so your ratio reflects one moment in time.

3. Apply your chosen formula

Plug your figures into the formula that suits your question. Debt-to-equity is the default, and the other two give a different view:

• Debt-to-equity: total debt ÷ total equity × 100
• Debt-to-capital: total debt ÷ (total debt + total equity) × 100
• Net gearing: (total debt − cash) ÷ total equity × 100

4. Interpret the result

A higher percentage means your business leans more on debt, while a lower one points to a stronger equity base. Compare the result with the benchmarks in the analysis section and with your own past figures.

Example gearing ratio calculations

Here’s how one business looks under each formula. Say your business has total debt of S$50,000, total equity of S$100,000 and S$10,000 in the bank.

Using the debt-to-equity formula

Divide total debt by total equity: S$50,000 ÷ S$100,000 = 0.5. Multiply by 100 and your gearing ratio is 50%.

Using the debt-to-capital formula

First, add debt and equity to get total capital of S$150,000. Then divide debt by capital: S$50,000 ÷ S$150,000 × 100 = 33.3%.

Using the net gearing formula

Subtract your cash from your debt to get net debt of S$40,000. Then divide by equity: (S$50,000 − S$10,000) ÷ S$100,000 × 100 = 40%.

Comparing the results

The same business reads 50% on debt-to-equity, 33.3% on debt-to-capital and 40% once cash is counted. At 50%, it sits right on the line where high gearing starts, while 33.3% looks safely moderate.

So always state which formula you’re using. Compare like with like when you check your ratio against a benchmark, a lender’s figure or last year’s result.

When to use the debt-to-equity ratio vs the gearing ratio

Since debt-to-equity is itself a gearing ratio, the practical choice is which gearing formula fits your question. Match the formula to what you need to know:

• Debt-to-equity: use it for quick snapshots and for comparing with common benchmarks, which are usually quoted on this basis
• Debt-to-capital: use it to see what share of your total funding comes from borrowing
• Net gearing: use it when you hold a large cash balance that could pay down part of your debt
• Several formulas together: use them side by side before a loan application or a major investment

Gearing ratio analysis

Your gearing ratio tells you more when you set it against a benchmark. Financial education guides from CMC Markets and IG use the same bands, usually quoted for the debt-to-equity formula:

• Below 25%: low gearing, with less risk and more stability
• 25–50%: moderate gearing, often seen as the optimal range
• Above 50%: high gearing, with more exposure to rising interest rates and slower sales

These bands are rules of thumb that shift by industry and growth stage. Both sources suggest comparing your ratio with businesses in the same industry.

Gearing shows your long-term funding mix, so pair it with liquidity ratios to check you can cover bills due in the next 12 months. Together, they give a fuller picture of your financial health.

High vs low gearing: what’s the difference?

The difference between high and low gearing comes down to how you balance debt and equity to fund your business. Each approach suits a different kind of business.

High gearing means relying more on debt than equity. A retail store taking out a large loan to buy inventory and renovate would have a high gearing ratio. This works well if sales thrive, but it gets risky if revenue drops or interest rates rise.

High gearing can suit your business if you:

• have stable cash flow that can cover repayments
• operate in a growing industry where revenue is rising
• see opportunities that need borrowing to scale quickly
• have a clear plan for the borrowed money to earn more than it costs

Low gearing means using more equity and less debt. A family-owned cafe expanding with saved profits may grow more slowly, but it keeps financial risk to a minimum.

Low gearing can suit your business when you’re:

• prioritising long-term security over rapid expansion
• operating in changeable market conditions
• protecting your credit rating by keeping debt low
• funding growth from savings and profit

Finding the right balance helps you manage risk while staying ready for growth opportunities.

What is a good gearing ratio for small businesses?

For most small businesses, a debt-to-equity gearing ratio between 25% and 50% is a sensible target. It leaves room to borrow for growth while keeping repayments manageable.

What counts as good also depends on your industry. NYU Stern professor Aswath Damodaran’s January 2026 data for US-listed companies shows book debt-to-capital of about 34% for system and application software, 37% for general retail and 58% for general utilities.

Treat these figures as a directional guide only, since they cover listed US companies and use the debt-to-capital formula. Service businesses often run at lower ratios, while retailers and manufacturers may carry more debt to fund stock and equipment.

How to improve your gearing ratio

If your ratio is higher than you’d like, these steps can bring it into a healthier range. Most work by reducing debt, growing equity or both:

• Pay down existing debt: start with high-interest loans and credit lines
• Retain more earnings: reinvest profits in the business rather than paying them all out, to build your equity base
• Borrow with purpose: check whether new debt is essential before taking on more loans
• Increase revenue: grow profits so retained earnings, and your equity, build up over time
• Restructure existing debt: negotiate better terms or consolidate loans to cut interest costs

As you pay down debt, watch your current ratio to make sure you keep enough cash for day-to-day bills. If your gearing is already low, you may have room to borrow strategically and grow faster at a manageable level of risk.

Manage your finances with Xero

Knowing your gearing ratio helps you borrow with confidence and plan growth on your own terms. Xero brings your accounting data into easy-to-read reports, so the figures you need stay up to date.

With Xero, you can:

• check your balance sheet any time for current debt and equity figures
• cut hours off bookkeeping with automated bank feeds
• work with your accountant or bookkeeper in real time
• keep your financial records in one secure, cloud-based place

Ready to see where your business stands? Get one month free and start tracking your gearing with Xero.

FAQs on gearing ratio

Here are quick answers to common questions about gearing ratios and how they apply to your business.

What is a good gearing ratio?

A good ratio sits in the typical range for your industry and holds steady or falls over time. A ratio that climbs every quarter tells you more than any single result, even while it’s still in the moderate band.

What does a gearing ratio of 60% mean?

On the debt-to-equity formula, 60% means you have S$60 of debt for every S$100 of equity, which puts you in the high band above 50%. Expect lenders to look closely at your cash flow and interest cover before they approve more borrowing.

Can a gearing ratio be over 100% or negative?

A debt-to-equity ratio above 100% means your debt exceeds your equity, while a negative result usually means your liabilities exceed your assets. Net gearing can also fall below zero when your cash is greater than your debt, which signals a net cash position.

How is the gearing ratio different from liquidity ratios?

Gearing weighs your debt against your equity, while liquidity ratios such as the quick ratio compare your most liquid assets with bills due soon. A business can have low gearing and tight cash at the same time, since money tied up in equipment or stock won’t pay this month’s bills.

Should I aim for high or low gearing?

Aim for the level that fits your current stage, since the right gearing can change as your business grows. You might gear up to fund a planned expansion, then bring the ratio back down as the new revenue repays the loan.

How often should I calculate my gearing ratio?

Calculate it at least quarterly, and again before any big decision such as taking a loan or bringing in an investor. Check it monthly while you’re repaying a large loan, so you can see the ratio fall as the balance drops.