Gearing (or financial leverage ratio) measures a company's level of indebtedness relative to its equity or total assets. It is typically expressed as net financial debt divided by equity (book or market), or as net debt divided by EBITDA. A higher gearing amplifies equity returns when operating profitability exceeds the cost of debt (positive leverage effect) but increases financial vulnerability in downturns. In business valuation, the target capital structure — and therefore the target gearing — determines the WACC: a higher gearing reduces the WACC (up to the point of financial distress) and theoretically increases equity value through the debt tax shield.

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Example: a Swiss industrial SME presents net debt of CHF 6.0 million and book equity of CHF 10.0 million — gearing of 60%. The sector median gearing is 40%. This above-average leverage, combined with EBITDA of CHF 2.5 million (net debt/EBITDA = 2.4x), remains within standard banking thresholds (typical ceiling: 3.0–3.5x) but limits the company's additional acquisition capacity and increases its specific risk premium in the WACC.

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Hectelion analyses gearing as a central indicator of financial structure and risk in every due diligence and financial structuring mandate.