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Explanations

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

Jim Riley

29th September 2017

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!

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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