Gearing Law and Legal Definition
The most common use of the term 'Gearing' is to describe Company’s net debt. It is the relationship between a company's borrowings and its stockholders' funds. It includes both prior charge capital and long-term debt. Therefore, a company with gearing of 70 per cent has levels of debt that are 70 per cent of its equity capital. The gearing ratio shows how encumbered a company is with debt. Depending on the industry, a gearing ratio of 15% would be considered prudent while anything over 100% would be considered risky or 'highly geared'. 'Gearing' is also used in a related sense to refer to borrowings by an investment trust that boosts the return on capital and income via additional investment. When the trust is performing well shareholders enjoy an enhanced or 'geared profit'. However if the trust performs poorly then the loss is similarly exaggerated. Gearing can also refer to the ratio between a company's share price and its warrant price. A company with a high proportion of prior charge capital to shareholders' funds is high geared, and is low geared if the reverse situation applies.