Why should potential investors consider the gearing ratio during their initial investment?

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The ratio that tests how leveraged an organisation is, may be referred to as:
Posted by:
Vinod Jetley
11-May-2015

High geared and low geared business organisation.

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Question added by jeyaraj jeyaraj , Lecturer in Accounting and Business Studies , INTERNATIONAL UNIVERSAL SCHOOL [JUNIOR COLLEGE]
Date Posted: 2013/04/29

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by jeyaraj jeyaraj , Lecturer in Accounting and Business Studies , INTERNATIONAL UNIVERSAL SCHOOL [JUNIOR COLLEGE]

A general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds.
Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.
A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
A greater proportion of equity provides a cushion and is seen as a measure of financial strength.

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