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gearing


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The ratio of a company's debt to its equity. Gearing (UK) or leverage (US) is the ratio of a company's debt to the part of its capital owned by shareholders. High gearing or leverage means high reliance on debt financing. This is risky for the shareholders, as debt service absorbs a large proportion of profits in a normal year, and in a bad year the cost of debt service may exceed total profits. This could lead to dividends being reduced or passed, and possibly to loss of control of the company to creditors or debenture holders.

Subjects: Economics.


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