Gearing ratio example: If total debt is $400,000 and total equity is $600,000, what is the gearing ratio?

• A. 0.67
• B. 0.50
• C. 1.00
• D. 0.40

Answer: (A)

Gearing ratio shows how much of the company’s financing comes from debt relative to equity. When defined as debt divided by equity, you compute it as total debt divided by total equity: 400,000 ÷ 600,000 = 0.6667, which rounds to 0.67. This means there is about 0.67 dollars of debt for every 1 dollar of equity. A higher gearing indicates more leverage and greater financial risk if profits fall. Some other definitions use debt to total capital (debt plus equity) or debt to assets, which would yield different numbers (for example, 0.40 in this case), but the given question uses the debt-to-equity definition, so the gearing ratio is 0.67.