In risk analysis, any ratio that measures a company's
leverage. One example of a gearing ratio is the
long-term debt/capitalization ratio, which is calculated by taking the company's
long-term debt and dividing it by its long-term debt added to its preferred and common
stock. Another example is a simple debt-to-equity ratio, which is calculated by dividing total
debt by total
equity. Generally, companies with higher leverage as determined by a leverage ratio are thought to be more
risky because they have more liabilities and less equity. A leverage ratio is also called a gearing ratio or an equity multiplier.