gearing ratio formula

The gearing ratio = long term debt / total shareholder's equity

This ratio indicate the capability of the company to meet its long term debt obligation. Normally, high gearing ratio is not preferred as the company may have difficulty to repay its debts. However, for some rapid growth industries with low market interest rate, high gearing ratio may be good because the company can make use of "low cost loan" to rapidly develop its products and capture more market shares.