Also known as Net Gearing, this is a measure of a company's financial leverage calculated by dividing its net liabilities by stockholders' equity.
The formula is : Total Debt - Cash / Book Value of Equity (incl. goodwill and intangibles)
It uses the book value of equity, not market value as it indicates what proportion of equity and debt the company has been using to finance its assets.
The gearing ratio shows how encumbered a company is with debt. Depending on the industry, a gearing ratio of 15% might be considered prudent, while anything over 100% would certainly be considered risky or 'highly geared'. As a general rule, net gearing of 50% + merits further investigation, particularly if it is mostly short-term debt. A highly-geared company is more vulnerable to a sudden bump in the road, either operationally or due a change in the economy (e.g. a recession or an increase in interest rates).