Community Forex Questions
What is a good or bad gearing ratio?
It is a comparison between an individual company and other companies in the same industry that determines a good or bad gearing ratio. To identify desirable and undesirable ratios, there are some basic guidelines to follow:
Anything above 50% is considered a high gearing ratio
Anything below 25% is considered a low gearing ratio
Gearing ratios between 25% and 50% are optimal
A company with a high gearing ratio will typically use loans to cover operational costs, exposing it to increased risk during economic downturns or interest rate increases. This could result in financial difficulties, if not bankruptcy.
A company with a low gearing ratio will typically have more conservative spending habits or will operate in a cyclical industry - one that is more sensitive to economic ups and downs - in order to keep its debts low. Companies with low gearing ratios maintain this by paying for major costs with shareholder equity.
Anything above 50% is considered a high gearing ratio
Anything below 25% is considered a low gearing ratio
Gearing ratios between 25% and 50% are optimal
A company with a high gearing ratio will typically use loans to cover operational costs, exposing it to increased risk during economic downturns or interest rate increases. This could result in financial difficulties, if not bankruptcy.
A company with a low gearing ratio will typically have more conservative spending habits or will operate in a cyclical industry - one that is more sensitive to economic ups and downs - in order to keep its debts low. Companies with low gearing ratios maintain this by paying for major costs with shareholder equity.
Sep 28, 2022 13:51