Gearing

From Reuters Financial Glossary

Synonym: Leverage

1. The ratio of a company's debt to equity. Gearing is an indicator of a company's ability to service its debt. A company with a high proportion of debt to equity (high gearing) is more vulnerable to fluctuations in business activity. It therefore represents higher risk for equity holders and offers greater return. Whether gearing is acceptable or not is often judged by comparisons with companies in similar industries or sectors. 2. In derivatives markets, gearing is the measure of the amount of cash spent purchasing an option or a futures contract, compared to the actual value of the underlying position. The more highly geared the trading position the greater the risk that a small change in market prices will completely wipe out the cash investment. That also means that a small change in market prices in the right direction can produce large profits in relation to the size of the cash investment. Gearing is also known as leverage.

See also: Derivatives