What is a good gearing ratio?

There is no single good level, and this site does not publish a band. Published ranges vary between sources and mean little without the formula. A property investor, a manufacturer and a professional practice can reasonably carry very different amounts of debt. A lender judges the figure against how reliably the assets would sell, how stable earnings are, and what the facility agreement requires. Comparing a business with its own history is usually more informative.

Can a gearing ratio be more than 100%?

On a debt-to-equity basis, yes: it means debt exceeds equity, so lenders have put in more than the owners. On a debt-to-total-capital basis it stays below 100% as long as equity is positive. If a business has negative equity, debt to equity is not a meaningful number and the reader moves to what the assets would fetch. A high figure may be planned, as in a leveraged acquisition, and depends on the earnings beneath it.

Are gearing and leverage the same thing?

The words overlap, and in general British usage gearing often just means borrowing. In a credit file they usually point to separate ratios, one built on the balance sheet and the other on the earnings line. Since a document can use either word for either measure, the safest step is to read the definition. In a facility agreement that definition, and not the everyday meaning, is what the borrower will be tested on.

Does revaluing property reduce gearing?

On reported figures, yes. An upward revaluation adds to equity without adding debt, so the ratio falls even though no cash has come in and the earnings are unchanged. That is why many lenders and facility agreements exclude revaluation surpluses or specify how and when a valuation can count. The revaluation may be perfectly genuine. The lender's question is whether that value would still be there in the circumstances in which it might need to sell.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Gearing Ratio: a Worked Example

The land went up. The ability to repay did not.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A lender reads gearing to see how much loss the owners' stake could absorb before lenders' money is touched. The ratio sets debt against equity, so everything depends on what the equity is made of. A holiday park with US$9.0m of debt reports 43% on a balance sheet holding US$14m of land revaluation and US$2m of goodwill. With both removed the figure is 180%, and the debt is six times a year's earnings. Which of those a covenant tests depends on one sentence in the facility agreement.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF Credit Analysis for Beginners

// 01 — WHAT THE RATIO IS MEASURING

Picture the balance sheet as a stack. Lenders sit at the top with a prior claim and owners sit beneath, taking the first loss. Gearing measures the depth of the layer underneath the lenders. If assets are sold for less than their book value, the shortfall comes out of equity first, so a thick layer gives more room for valuations to be wrong.

That makes it a question about the point of failure and not about the journey there. It matters most where a lender's repayment may come from selling assets: property, farms, businesses with a large asset base. It matters less for a software company, whose assets may be mainly goodwill and other intangibles and whose lender depends on recurring revenue.

// 02 — THE VERSIONS IN USE

Debt to equity = debt ÷ equity

Debt to total capital = debt ÷ (debt + equity)

Net gearing = (debt − cash) ÷ equity

Debt to tangible worth = debt ÷ (equity − intangible assets)

There is no single definition, so a stated percentage means little until the formula is known. The same business can be 100% on the first line and 50% on the second. Some readers go further and use total liabilities. In the UK "gearing" is sometimes used loosely for borrowing of any kind, so a reader of a UK document should check which measure is meant.

What counts on each side is a judgement. Lease liabilities are debt in many readings and not in others. A shareholder loan is debt in the accounts, but a lender may treat it as equity if it is subordinated under a deed of priority, since it then ranks behind the bank in practice. Goodwill is commonly removed to reach tangible net worth, because it has little value when the business has failed.

Revaluation is the largest variable. Under IAS 16 and its local versions, and under FRS 102 in the UK, a business may carry the property it operates from at cost or choose to carry it at a revalued amount, with the uplift going to a reserve within equity. Investment property follows its own rules. Two identical businesses can therefore report very different gearing, depending on an accounting policy and on when the last valuation was done.

// 03 — THE EXAMPLE

A family-owned holiday park on the coast, constructed for this page like every figure in it, bought a second park some years ago. Its land and buildings are carried at a valuation of US$27.0m, including US$14.0m of revaluation. Deferred tax is left out to keep the sum simple.

Land and buildings, at valuation 27.0 Bank debt 9.0

Plant and cabins 2.5 Other liabilities 2.0

Goodwill 2.0 Equity 21.0

Cash and other 0.5

Total assets 32.0 Total 32.0

Debt to equity: 9.0 ÷ 21.0 = 43%

Debt to total capital: 9.0 ÷ (9.0 + 21.0) = 30%

Less goodwill: 9.0 ÷ (21.0 − 2.0) = 9.0 ÷ 19.0 = 47%

Less revaluation too: 9.0 ÷ (19.0 − 14.0) = 9.0 ÷ 5.0 = 180%

Land and buildings fall 30%: 27.0 × 30% = 8.1

Tangible equity after the fall: 19.0 − 8.1 = 10.9

Debt to tangible equity: 9.0 ÷ 10.9 = 83%

EBITDA 1.5: debt to EBITDA = 9.0 ÷ 1.5 = 6.0×

Every line is arithmetically correct, and they answer different questions. The 43% assumes the valuer is right. The 180% counts only what the owners put in and retained, less goodwill. The 83% shows the cushion holding after a large fall in value, which is what the ratio is for. Then the last line changes the conversation. The lenders are well covered if the land is sold, and the park's earnings will take a long time to repay them. Those levels are the example's, not a market norm.

// 04 — WHY IT IS READ BESIDE EARNINGS

The holiday park shows one way the two measures disagree: comfortable on the balance sheet and stretched on earnings, the usual pattern for appreciating land held by a business that earns little. The opposite also occurs: a services business with a goodwill-heavy balance sheet or negative equity can have strong cash flow and repay quickly. Debt to EBITDA reads the speed of repayment. Gearing reads the loss-absorbing layer. A lender wants a way out through cash and a second way out through assets, and a ratio for each.

DEFINED IN ONE PARAGRAPH → · DEBT TO EBITDA AND LEVERAGE → · TANGIBLE NET WORTH →

// 05 — WHERE IT DECIDES A FILE

Gearing and tangible net worth covenants appear in many smaller and asset-backed facilities, and the drafting decides what they catch. A covenant on equity as reported can be cured by a fresh valuation. One that excludes revaluations after a stated date cannot. The same goes for intangibles, for shareholder loans and for dividends, which reduce equity and may be restricted while the ratio is tight.

It also shapes the ask when a business is weak. A lender may seek new equity, or the conversion or subordination of shareholder loans, which deepens the layer beneath it without new cash from the owners. And a lender reading a sharp fall in gearing should look for its cause first. New capital and retained profit are different in kind from a revaluation, which adds no cash at all.

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Accounting Standards Board, AASB 116 Property, Plant and Equipment, the Australian text of IAS 16 — paragraphs 31 and 39 — Allows property to be carried at a revalued amount, with increases taken to other comprehensive income and held in equity as a revaluation surplus — section 02.
Financial Reporting Council, FRS 102, September 2024 edition — paragraphs 17.15 and 17.15E — The UK equivalent: an entity chooses the cost model or the revaluation model, and a revaluation increase goes to other comprehensive income and is accumulated in equity — section 02.

// QUESTIONS PEOPLE ASK

What is a good gearing ratio?: There is no single good level, and this site does not publish a band. Published ranges vary between sources and mean little without the formula. A property investor, a manufacturer and a professional practice can reasonably carry very different amounts of debt. A lender judges the figure against how reliably the assets would sell, how stable earnings are, and what the facility agreement requires. Comparing a business with its own history is usually more informative.
Can a gearing ratio be more than 100%?: On a debt-to-equity basis, yes: it means debt exceeds equity, so lenders have put in more than the owners. On a debt-to-total-capital basis it stays below 100% as long as equity is positive. If a business has negative equity, debt to equity is not a meaningful number and the reader moves to what the assets would fetch. A high figure may be planned, as in a leveraged acquisition, and depends on the earnings beneath it.
Are gearing and leverage the same thing?: The words overlap, and in general British usage gearing often just means borrowing. In a credit file they usually point to separate ratios, one built on the balance sheet and the other on the earnings line. Since a document can use either word for either measure, the safest step is to read the definition. In a facility agreement that definition, and not the everyday meaning, is what the borrower will be tested on.
Does revaluing property reduce gearing?: On reported figures, yes. An upward revaluation adds to equity without adding debt, so the ratio falls even though no cash has come in and the earnings are unchanged. That is why many lenders and facility agreements exclude revaluation surpluses or specify how and when a valuation can count. The revaluation may be perfectly genuine. The lender's question is whether that value would still be there in the circumstances in which it might need to sell.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

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THE NUMBER · THE LOAN · CAPACITY

A US$2m machine is expected to save US$400k of cash a year. The borrower asks for a three-year loan to buy it.

How long does the machine take to pay for itself?

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THE READING ROOMIN ONE PARAGRAPHGearing What is gearing, and how is it different from leverage?