What characterizes the capital structure of an organization with high operational gearing?

The capital structure of an organization with high operational gearing is characterized by a higher proportion of fixed costs. This concept pertains to how a company manages its costs in relation to its sales volume.

Operational gearing refers to the ratio of fixed costs to variable costs in a company's operations. When a company has high operational gearing, it implies that a significant portion of its costs remains constant regardless of the level of production or sales, which means that fixed costs are prevalent in its cost structure. This can lead to greater financial leverage as the company may benefit from increased profits when sales rise, but it also comes with a higher risk if sales decline, as the fixed costs must still be covered.

This high proportion of fixed costs can allow companies to amplify growth in profits during periods of high sales, but conversely, it can also lead to larger losses when sales are low, underscoring the inherent risks associated with such operational gearing. The relationship between sales volume and profitability is therefore more sensitive for companies with high operational gearing.

In contrast, a balanced mix of debt and equity would not specifically indicate high operational gearing, nor would it reflect the predominance of fixed costs. A lower risk profile generally relates to lower operational gearing, as it would imply a more flexible