What is financial gearing a measure of?

Financial gearing is a measure of the level of debt compared to equity in a company's capital structure. It indicates how much of the company's capital is financed through debt versus equity. A higher level of financial gearing suggests that a company is more leveraged, which can amplify both potential returns and risks. When a company utilizes debt effectively, it can enhance returns on equity when profits are high; however, it also exposes the company to greater financial risk, particularly during downturns when it must service its debt.

This measure is critical for investors and stakeholders as it impacts their assessment of a company's risk profile and financial stability. Understanding financial gearing helps in determining how much financial risk a company carries compared to its equity holders, thus influencing investment and funding decisions.