The term gearing is all about the relationship between the level of Equity in a business and the amount of money that is currently being borrowed.
Generally speaking, a bank manager is relatively happy to maintain Gearing at 1:1. This means that for every R1 that you have interested in the business, the bank manager will also invest R1.
When Gearing goes over and above 1:1 this is the time when you may experience increasing pressure from the bank to replay some of your loans. After all, the bank does not want to put more money into your business than you have invested yourself.
Example:
A) Interest - Bearing Borrowings = R4,541,263 B) Net Worth = R5,342,663 C) Gearing Ratio = 0.8:1 (A ÷ B)
Discussion:
There are two different ways of expressing Gearing, this method provides you with a Gearing Ratio; the other provides you with the Gearing%. Although both KPI are called Gearing, they do measure slightly differently.