Capital gearing ratio – Meaning & Example

Capital gearing ratio represents the relationship between equity share capital of a firm and its fixed interest bearing funds. Fixed interest bearing funds include preference share capital, debentures, bonds and other type of loans which bear a fixed rate of interest on it.

This ratio is used to measure the ‘degree of leverage’ of a firm. A firm having low capital gearing ratio will be called as highly leveraged and vice versa.

Formula for computing capital gearing ratio:

Capital gearing ratio can be calculated by using below given formula:

Equity share capital / fixed interest bearing funds


Equity share capital refers to total share capital minus preference share capital.


Let’s assume that ABC Ltd Company has following figures on its balance sheet:

Equity share capital1,00,00,00090,00,000
Preference share capital28,00,00045,00,000

Using the above given figures, we are able to calculate capital gearing ratio for year 2012 and 2013 separately.

For the year 2012:

1,00,00,000 / 80,00,000 = 1.25 : 1

For the year 2013:

90,00,000/ 1,12,50,000 = 0.8 : 1

The above results show that the company was low geared (leveraged) in 2012 whereas it was highly geared (leveraged) in the year 2013.

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