Capital Gearing Ratio Calculator
Calculate the capital gearing ratio — debt and preference shares against equity funds — to assess financial risk and leverage.
Calculate the capital gearing ratio — debt and preference shares against equity funds — to assess financial risk and leverage.
See the balance between fixed-cost capital and equity funding your business.
Highly geared firms suffer most when profits dip — know your exposure.
Model how new debt or equity issuance shifts your gearing.
Gearing tells investors how risky the capital structure is — compute what they will.
Borrowing magnifies returns in a good year and losses in a bad one by the same mechanism. Gearing measures how much amplification has been built in.
A utility carries high gearing safely on predictable regulated cash flows. A cyclical manufacturer at the same level is genuinely fragile.
Capital Gearing Ratio = (Long-term Debt + Preference Share Capital) ÷ Equity Shareholders' Funds, where Equity Shareholders' Funds = Equity Share Capital + Reserves & Surplus. It compares fixed-cost sources of capital (debt and preference shares, which carry a fixed interest or dividend obligation) against funds that bear no fixed obligation (ordinary equity).
A company is "highly geared" when fixed-cost capital (debt + preference shares) exceeds equity shareholders' funds — a ratio above 1. It is "low geared" or "conservatively geared" when equity funds exceed fixed-cost capital — a ratio below 1. High gearing amplifies both potential returns and potential losses for equity holders, a concept known as financial leverage.
In a highly geared company, interest and preference dividends must be paid regardless of how profitable the business is in a given year, so any earnings beyond those fixed obligations flow disproportionately to a relatively small equity base — amplifying returns in good years and losses in bad years. Low-geared companies have steadier, less leveraged returns for equity holders.
The debt-equity ratio typically only compares total debt to equity. Capital gearing ratio is broader — it groups preference share capital together with debt (since both carry a fixed return obligation, unlike ordinary equity) and compares that combined total against equity shareholders' funds specifically, giving a fuller picture of fixed-obligation capital in the structure.
There's no universal target — capital-intensive, stable-cash-flow industries (utilities, real estate) can sustainably run higher gearing than cyclical or volatile-earnings businesses, which are safer with lower gearing. As a broad rule of thumb, a ratio meaningfully above 1 (more fixed-cost capital than equity) warrants a closer look at whether earnings reliably cover the fixed obligations.
Raise new equity capital instead of debt for future financing, retain and reinvest profits to build reserves, convert or redeem preference shares, or pay down long-term debt using surplus cash flow — each of these shifts the balance back toward equity-funded, lower-gearing capital structure.