Gearing, also called leverage, is the degree to which a company’s operations are funded by lenders versus shareholders.Most companies use a combination of debt and equity to finance company operations. A healthy amount of gearing benefits a company. Too much debt, however, can be bad if the company’s performance turns negative. The issue is that gearing magnifies both profits and losses. If a company is performing well, intelligent gearing increases profits to shareholders. If it is doing poorly, gearing increases losses. There many financial ratios that express gearing. One of the most common is the debt-to-equity ratio. This is simply total debt divided by total equity. For example, if Big Idea Company has $500k of long-term debt, $500k of short-term debt, and $2 million of shareholder’s equity, it has a 50% debt-to-equity ratio. Therefore, you could say it is geared 50%. Let’s say the next year it sells $2 million of new shares and adds $500k of long-term debt. Its gearing is now 1.5 / 4 = 37.5% Lenders look at gearing ratios carefully to decide whether to lend to a company. Investors and analysts also use them to decide if a company is overly geared, and therefore risky. Some industries normally use more gearing than others. Capital-intensive industries such as oil production, telecommunications and railroads typically have higher gearing. Cyclical industries generally have lower gearing, because when profits decline during a cycle, they do not want high interest payments depleting the limited profits.