What does the gearing ratio measure?

The gearing ratio is a financial metric that assesses a company's financial leverage by comparing its net debt to total equity. This ratio provides insight into the proportion of a company's capital that is financed through debt versus equity. A higher gearing ratio indicates that a larger portion of the company’s capital structure is made up of debt, which may signify greater financial risk, as the company is more reliant on borrowing. Conversely, a lower gearing ratio suggests that the company is less dependent on debt financing and potentially has a more stable financial position.

Understanding the gearing ratio is vital for stakeholders, including investors and creditors, as it can indicate the company's risk profile and its ability to meet financial obligations. It also plays a crucial role in strategic financial planning and management, helping firms balance debt and equity financing in alignment with their overall business strategy.

The other options pertain to different financial metrics: operating profit over revenue measures profitability relative to sales; current assets over current liabilities looks at liquidity and short-term financial health; and revenue over equity typically relates to efficiency in generating sales relative to the equity invested in the business. However, these do not specifically address financial leverage in the same way that the gearing ratio does.