Capital Gearing Ratio – This ratio establishes the relationship between the fixed interest-bearing securities and equity shares of a company. It is calculated as follows:
Capital gearing ratio
=Fixed interest-bearing securities / Equity shareholders’ funds
Fixed-interest bearing securities carry with them the fixed rate of dividend or interest and include preference share capital and debentures. A firm is said to be highly geared if the lion’s share of the total capital is in the form of fixed interest-bearing securities or this ratio is more than one. If this ratio is less than one, it is said to be low geared. If it is exactly one, it is evenly geared. This ratio must be carefully planned as it affects the firm’s capacity to maintain a uniform dividend policy during difficult trading periods that may occur. Too much capital should not be raised by way of debentures, because debentures do not share in business losses.