Net Gearing (GEAR)

A strong cash position is a clear advantage for a company; conversely, excessive gearing can be dangerous and can at times threaten a company's survival.

As a guideline, net gearing of over 50% calls for further investigation. This is especially the case if a large proportion of overall borrowings are short-term. A highly-geared company is more vulnerable to changes in interest rates. It is also more vulnerable to a sudden recession or unexpected major strike, as it is more likely to be fully invested and committed operationally.

If the net gearing percentage is worrying, the sector moon should be checked to ascertain the norm for the industry.

The net gearing figure in the key statistics is calculated by taking the total borrowings less cash, treasury bills and certificates of deposit, and expressing the resultant figure as a percentage of shareholders funds including intangibles, such as brand names, copyrights and goodwill. Note
that the cash figure does not include marketable securities as they may be difficult to realise in an emergency. Aminus sign indicates negative net gearing and denotes a net cash position (also expressed as a percentage of shareholders' funds including intangibles).

A much fuller explanation of the method of calculation and the implications of gearing is set out under GEARING, COVER.