To calculate a gearing ratio, divide a company’s interest-bearing debt by its shareholders’ equity, both pulled from the balance sheet. That standard version is the debt-to-equity ratio, and it’s what most people mean by “gearing.” Three close relatives — the debt-to-capital ratio, the net gearing ratio, and the interest coverage ratio — answer slightly different questions about the same underlying issue: how much the business leans on borrowed money. Once you know which numbers to use, each calculation takes a few minutes.
What You Need From the Balance Sheet
Every gearing ratio draws from two sections of the balance sheet: liabilities and equity. For public companies, those statements sit inside the 10-K and 10-Q filings available through the SEC’s EDGAR database.1U.S. Securities and Exchange Commission. Exchange Act Reporting and Registration
The debt figure includes only interest-bearing obligations: bank loans, bonds, lines of credit, and the current portion of any long-term debt coming due within 12 months. Leave out accounts payable, accrued wages, and tax liabilities. Those are operating obligations, not financing, and including them inflates the ratio and distorts the picture.
Shareholders’ equity sits at the bottom of the balance sheet and includes common stock, retained earnings, and additional paid-in capital. If the company has accumulated losses, retained earnings can go negative, which shrinks equity and pushes the ratio up sharply. That’s the ratio working as intended, not a math error.
The notes to the financial statements are worth opening too. They break down individual debt instruments with their interest rates, maturities, and covenants, and Regulation S-X requires those disclosures in quarterly and annual filings.2eCFR. 17 CFR 210.10-01 – Interim Financial Statements
The Four Formulas and When to Use Each
Debt-to-Equity Ratio
This is the default gearing ratio.
Debt-to-Equity Ratio = Total Debt ÷ Total Shareholders’ Equity
If a company reports $400,000 in interest-bearing debt and $800,000 in equity, dividing gives 0.5, or 50%. For every dollar owners have invested, creditors have lent 50 cents. A ratio of 1.0 means debt and equity are equal; above 1.0 means the company owes lenders more than owners have put in. The result can be expressed as a decimal (0.5), a percentage (50%), or a proportion (0.5:1). All three say the same thing.
Debt-to-Capital Ratio
Instead of comparing debt to equity alone, this version compares debt to the whole capital base.
Debt-to-Capital Ratio = Total Debt ÷ (Total Debt + Total Shareholders’ Equity)
With the same numbers, $400,000 divided by $1,200,000 is roughly 0.33, or 33.3%. The debt-to-equity version told us creditors provided half as much as owners; the debt-to-capital version tells us debt makes up a third of total financing. Both are true. Debt-to-capital has one practical advantage: it’s bounded between 0% and 100%, which makes it easier to compare heavily leveraged firms whose debt-to-equity ratios can run past 200%.
Net Gearing Ratio
The standard formula treats a company with $500,000 in debt and $400,000 in cash the same as one with $500,000 in debt and $10,000 in cash. The net gearing ratio corrects that by subtracting cash and cash equivalents from debt before dividing.
Net Gearing Ratio = (Total Debt − Cash and Cash Equivalents) ÷ Total Shareholders’ Equity
If the first company has $600,000 in equity, net gearing is ($500,000 − $400,000) ÷ $600,000 = 0.167, or 16.7%. The second comes in at ($500,000 − $10,000) ÷ $600,000 = 0.817, or 81.7%. Companies sitting on cash can pay down debt whenever they choose, so netting it out gives a more honest reading of actual leverage.
Interest Coverage Ratio
The three ratios above are balance sheet measures. They say nothing about whether the company can actually afford its debt payments. The interest coverage ratio closes that gap by pulling from the income statement.
Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) ÷ Interest Expense
A company earning $300,000 in EBIT and paying $100,000 in annual interest has a coverage ratio of 3.0 — it earns three times what it needs to cover interest. Below 1.0 means earnings don’t cover interest at all, which is a serious warning sign. Most analysts treat anything above 2.0 as adequate and anything below 1.5 as a red flag. A moderately geared company with thin, volatile earnings can still struggle; a highly geared company with stable earnings can be fine. Running the balance sheet ratios alongside interest coverage gives a more complete read than either alone.
Reading the Result
A debt-to-equity ratio above 50% is generally considered high gearing. The company leans heavily on borrowed money, which magnifies both returns and risk. When business is good, debt amplifies profits because the company earns returns on borrowed capital while paying only fixed interest. When revenue drops, those interest payments don’t shrink with it.
Below 25% is typically considered low gearing. The company funds most operations through equity, giving it a larger cushion in a downturn. Low gearing isn’t automatically better, though. Interest is tax-deductible and lenders accept lower returns than shareholders demand, so debt is usually cheaper than equity. A company that avoids debt entirely may be passing up cheaper growth capital.
Those thresholds are starting points, not rules. The right level depends on the industry, the stability of cash flows, and interest rate conditions. A utility with predictable monthly revenue can carry much more debt than an early-stage software company.
Sector data from January 2026 shows the spread. In capital-intensive sectors, general utilities carried an average market debt-to-capital ratio of about 43%, and power companies averaged roughly 42.5%. At the other end, software companies averaged around 5% debt-to-capital and semiconductor firms about 2.5%.3NYU Stern – Aswath Damodaran. Debt Fundamentals by Sector (US) Manufacturing sits in between: machinery companies averaged about 14% market debt-to-equity, and auto parts manufacturers closer to 41%. The total market average excluding financials was approximately 17% debt-to-equity.4NYU Stern – Aswath Damodaran. Debt Fundamentals by Sector (US) Always compare a company’s gearing to its sector peers rather than to a universal threshold.
Adjustments That Change the Answer
Under current accounting rules (ASC 842), companies recognize nearly all leases on the balance sheet as liabilities. Before that standard, most operating leases lived off the balance sheet entirely. Now a company that leases its offices, vehicles, or equipment shows those obligations as lease liabilities, and that can inflate gearing ratios if you aren’t careful about what you’re measuring.
Finance lease liabilities are generally treated as debt. Operating lease liabilities, while they now appear on the balance sheet, are typically presented separately, and many analysts exclude them from gearing calculations to keep figures comparable with historical ratios. Some lenders include all lease liabilities in covenant calculations. Decide upfront whether you’re including leases and be consistent. If you’re checking compliance with a loan covenant, the covenant’s own definition of “debt” controls, so read it closely.
Limitations of the Snapshot
These ratios capture the balance sheet on one date. A company could take on a massive loan on January 2 and still look conservatively financed in its December 31 annual report.
They also rely on book values, which can diverge from market values. A company whose assets have appreciated since purchase shows lower equity on its books than those assets are worth, making the ratio look worse than economic reality. Companies with impaired assets that haven’t been written down look better than they should.
Accounting policy choices move the result too. Expensing research and development immediately reduces net income and retained earnings, shrinking the equity denominator and pushing the ratio higher. Capitalizing the same costs defers the expense, preserves equity, and produces a lower ratio for economically identical spending. Two companies with identical operations and identical debt can show different gearing ratios purely because of how they account for the same costs.
Finally, gearing ratios ignore the terms of the debt. A company at 60% debt-to-equity funded by low-interest, long-maturity bonds is in a fundamentally different position than one at 60% funded by high-interest revolving credit due in 18 months. The ratio is the same; the risk is not. Pairing the balance sheet ratios with the interest coverage ratio and a careful look at the debt maturity schedule in the notes gives a much more complete picture.