In finance, gearing is the general term used to describe the ratio between an investor’s market exposure to borrowed funds.



The higher a firm’s financial leverage, the riskier the firm’s operations are considered to be. The most typical system of determining an acceptable level of financial leverage is by comparing operations to others firms in the same industry.



Because a firm must continue to make payments on debt no matter what the business climate, firms with higher leverage are generally considered more susceptible to economic downturns. But financial leverage may also increase an investor’s returns. Lower leverages suggest financial leeway that may sustain operations when business turns.



Financial Leverage in Markets & FX