An accounting ratio which measures the level of debt finance a company has raised relative to its level of shareholders’ funds, also known as the debt to equity ratio. It is usually defined as debt divided by shareholders’ funds, expressed as a percentage. The precise definition will vary, however, from situation to situation. The higher the percentage from the calculation, the more highly geared a company is. It is possible to calculate the net gearing ratio, where cash balances are deducted from debt in the calculation. See also Interest Cover and Gearing.

The ratio of debt to equity. The higher the ratio of debt to equity the more highly geared a company is said to be. The debt:equity ratio suitable for a particular company will, to some extent, depend on the nature of that business. Generally speaking, low risk businesses can afford higher gearing than high risk businesses. Companies rarely make primary issues of shares, making use of debt markets for ongoing financing needs; and to attract debt finance, corporates have to maintain their creditworthiness, which is in part determined by the debt:equity ratio. A sufficient level of equity capital is necessary to lessen the risk of default on debt obligations and to give a credit status high enough to encourage those with funds surpluses to become creditors. Equity capital protects lenders. This is the most explicit link between the debt and equity markets.

The ratio of debt finance to the total shareholders' funds.