What Is Gearing Ratio? A 2025 Guide for Australian Investors

When you’re sizing up a company—whether for investment, lending, or business partnership—the gearing ratio is a number you can’t afford to ignore. In 2025, as Australian businesses and households navigate higher interest rates and tighter lending standards, understanding this simple yet powerful metric is more important than ever. But what exactly is the gearing ratio, and why does it matter so much for your financial decisions?

What is the Gearing Ratio?

The gearing ratio measures the proportion of a company’s capital that comes from debt compared to equity. In other words, it shows how much a business relies on borrowed funds to finance its operations. The most common formula is:

• Gearing Ratio = (Total Debt / Equity) × 100%

There are variations—some use net debt, others include all liabilities—but the core idea is the same: higher gearing means higher reliance on debt, which can amplify both profits and risks. In 2025, with the RBA’s cash rate hovering above 4.5%, companies with high gearing are facing increased scrutiny from investors and lenders alike.

Why Does the Gearing Ratio Matter?

For investors and business owners, the gearing ratio is a quick gauge of financial risk. Here’s why it’s front of mind in the current climate:

• Interest Rate Pressure: With borrowing costs at multi-year highs, companies with a lot of debt are seeing their interest expenses surge. This eats into profits and can strain cash flow.

• Bank Lending Standards: Australian banks, following APRA’s 2025 risk guidelines, are now more likely to flag or decline loans to highly geared businesses, especially in property and retail sectors.

• Investor Confidence: Shareholders and analysts pay close attention to gearing ratios when assessing dividend sustainability and the risk of capital raisings or asset sales.

For example, major ASX-listed retailers like Myer and Harvey Norman have recently reported lower gearing ratios, aiming to reassure investors after a volatile 2024.

Real-World Examples & 2025 Policy Updates

Let’s take a closer look at gearing in action, and the regulatory backdrop shaping it this year:

• Property Developers: In Sydney and Melbourne, gearing ratios for listed developers have become a hot topic as new APRA lending caps limit how much debt these firms can take on. Many are shifting to joint ventures or equity financing to keep projects moving.

• Small Businesses: The Federal Government’s 2025 SME Recovery Grant scheme now requires applicants to disclose gearing ratios, with lower-geared businesses favoured for grant approval.

• Banking Sector: The major banks’ half-year results showed average gearing across their business lending portfolios has dropped 8% year-on-year—a direct response to stricter prudential standards and the ongoing cost-of-living squeeze.

These examples highlight the practical impact: businesses with manageable gearing are better positioned to weather economic shocks, access funding, and attract investors.

How to Use the Gearing Ratio for Smarter Decisions

Whether you’re an investor, business owner, or property buyer, here’s how you can leverage gearing ratios in 2025:

• Benchmark Against Peers: Compare a company’s gearing ratio to industry averages. For example, utilities and infrastructure firms typically have higher gearing (60–70%), while tech or healthcare businesses often run lower (20–40%).

• Look for Trends: Rising gearing over several years can signal growing risk, while steady or declining gearing often indicates prudent management.

• Assess Loan Terms: If you’re applying for business finance, know your gearing ratio—lenders will use it to set rates and conditions.

• Factor in the Economic Cycle: In a high-rate environment, lower gearing usually means greater resilience.

Remember, there’s no ‘perfect’ gearing ratio—it’s about context, sector norms, and your own risk tolerance.

Conclusion

The gearing ratio isn’t just an accounting number—it’s a lens into a business’s resilience and risk. In 2025, as Australia adjusts to a higher-for-longer interest rate environment, understanding and monitoring gearing ratios is essential for anyone making investment, lending, or strategic business decisions. Keep it on your radar, compare across industries, and use it to sharpen your financial judgment in a fast-changing landscape.