Gearing

A company’s gearing (taux d’endettement) is the ratio of its net debt to its equity. Net debt adds up bank and bond borrowings, private debt, leasing and other financial debt, then deducts available cash. Gearing of 100% means that net debt equals equity. This structure ratio shows how financing is split between shareholders and creditors: the higher it is, the larger the creditors’ share in financing the assets. It is read alongside total leverage, which divides the same debt by EBITDA and measures repayment capacity, whereas gearing describes the structure of the balance sheet. In an acquisition financing, the acquisition holding company shows high gearing by construction. Lenders then analyse the consolidated leverage of the group. A company’s gearing differs from the debt ratio of a household (taux d’endettement des ménages), which divides loan repayments by income. Some facilities agreements make it a covenant. The Loan Market Association model for leveraged financings favours ratios based on EBITDA and cash flow, and reserves net worth or loan to value covenants for asset-backed financings.

A company shows €70m of gross financial debt, €10m of cash and €80m of equity. Its net debt reaches €60m and its gearing 75%. After a €40m unitranche financing used entirely for an acquisition, net debt rises to €100m and gearing to 125%, with equity unchanged.

• The definition of net debt used: leasing, lease liabilities, earn-outs.
• The treatment of cash: gross, available, restricted.
• Reading it together with total leverage on EBITDA.
• Whether the agreement contains a gearing covenant, and its level.