Capital gearing ratio

 The term capital gearing is used to describe the relation ship between equity share capital including reserves and surplus to preference share capital and other fixed interest bearing loans. If preference share capital and other fixed interest bearing loans exceed the equity share capital including reserves the firm is said to be highly geared. The firm is said to be in low gear if preference share capital and other fixed interest bearing loans are less equity capital and reserves.

Capital gearing ratio is very important leverages ratio. Gearing should be kept in such a way that the company is able to maintain a steady rate of dividend. High gearing ratio is not good for a new company or company in which future earning are uncertain.