Capital Gearing Ratio Calculator
Calculate the capital gearing ratio — fixed-cost capital (long-term debt + preference shares) against equity shareholders' funds — to assess financial risk and leverage.
Frequently Asked Questions
What is the capital gearing ratio formula?
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).
What does "high gearing" versus "low gearing" mean?
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.
Why does capital gearing matter to investors?
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.
How is capital gearing different from the debt-equity ratio?
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.
What is a good capital gearing ratio?
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.
How can a company reduce its capital gearing ratio?
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.