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Gearing - Why Big Companies Like Debt as a Source of Finance (But Problems Lie Ahead)

Jim Riley

29th September 2017

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Debt (e.g. loans) rather than Equity (i.e. share capital) is the favourite source of finance for large business, particularly during periods where interest rates are very low - as now.

Companies with a high proportion of their finance provided by debt are said to be "highly geared". That means they have a high gearing ratio.

When interest rates are low and profits are enough to pay the interest, that's a not a problem. So companies add more debt!

But, what happens when interest rates start to rise and perhaps profits and cash flows weaken?

This short video from the FT explores the potential problem!

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Jim Riley

Jim co-founded tutor2u alongside his twin brother Geoff! Jim is a well-known Business writer and presenter as well as being one of the UK's leading educational technology entrepreneurs.

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