Gearing

Gearing refers to a company’s financial leverage: how much debt it has relative to equity capital. Some form of debt financing is usually seen as positive as debt is a cheaper form of funding than equity. But high gearing or leverage increases a company’s vulnerability to economic shocks or default. As such, lenders and investors will insist on debt-equity and debt-service caps and other borrowing limits in the covenant package in order to protect their interests.