Indebted to gearing for better returns

Article Abstract:

Gearing is a term that may confuse investors seeking to understand corporate balance sheets. Gearing can help boost profits although interest has to be paid on borrowed money, but it can also lead to bankruptcy due to the weight of interest. The proportion of debt to funds invested by stockholders is one indication of whether debt levels are too high. Companies may caluclate their gearing for stockholders, and stockholders can also calculate it themselves.

Analysis

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Why it's not so bad to be up to your neck in debt

Article Abstract:

Gearing is less of a problem for companies in activities with a reliable cash flow, such as bus lines. Banks are also less worried about gearing when assets can be easily sold. Food retailers also tend to have reliable cash flows, while manufacturers may face risks such as a drop in sales or a product becoming outmoded. Income gearing relates to the percentage of profit used for debt repayments. Banks focus on operating profit when loans are approved.

Management

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