What does gearing refer to in a financial context?

Gearing refers to the proportion of debt in a company's capital structure, highlighting the relationship between the company's borrowed funds and equity. A high level of gearing indicates that a larger portion of the company’s capital is financed through debt, which can amplify both potential returns and risks. This is important because companies with high gearing ratios might face higher financial risk, particularly in adverse economic conditions, affecting their ability to meet interest payments and repay debt.

Understanding gearing is crucial for investors and financial analysts as it provides insights into the company's financial stability, risk profile, and potential for growth. By analyzing the balance between debt and equity, stakeholders can assess how leveraged the company is, and this affects both strategic decision-making and investment evaluations.