Gearing
What is gearing, and how is it different from leverage?
ONE OF 180 TERMS · FREE · NO SIGNUP
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
Gearing measures a business's debt against its owners' funds — debt to equity, or debt to tangible net worth once intangible assets are taken out. It answers how much of the business the lenders have financed and how much the owners have, and so how far asset values can fall before the lenders' money is at risk. A business can be lightly geared on a revalued balance sheet and heavily leveraged on what it actually earns, which is why a desk reads both.
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.
// WHAT IT IS NOT
Gearing is not leverage in the lending sense: leverage usually means debt against earnings, debt to EBITDA, a measure of capacity; gearing is debt against equity, a measure of the cushion.
// WORKED IN
// NEXT TO IT
- Cash conversion cycle
- Quality of earnings
- Debtor days
- Debt service cover ratio (DSCR)
- Interest cover ratio
- Debt to EBITDA (leverage)
- Dividend payout ratio
- Debt per kgMS
- Fixed charge cover ratio (FCCR)
- Global cash flow
- Adjusted EBITDA
- Creditor days (DPO)
- Inventory days (DIO)
- Maintenance capex
- Tangible net worth
- Downside case
- Breakeven milk price
- Debt-like items
- Operating leverage
- EBITDAR
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