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Capital gearing is the most crucial factor, which must be taken into account while preparing the financial plan of a company. The term ‘gearing’ means the ratio between the various types of securities to total capitalization. Capital gearing is the process that determines the proportion in the various accounts of securities, which are being issued.

Capital Gearing or structure means the decision about the ratio, which different types of securities will bear, to total capitalization. Capital gearing or structure is the fixation of the appropriate ratio between two or more types of securities and the ratio that each type of security will bear to the total capitalization.

Capital Gearing can be defined as, “The mixture of debt and equity in a firm’s capital structure, which influences variations in shareholders profits in response to sales and EBIT variations.”

A company is stated to be highly geared when the proportion of the equity capital to the total capital is small or when the proportion of preference shares and debentures bearing fixed rate on dividend. On the other hand, the company is said to be low geared if it has a larger proportion of funds raised through the issue of equity shares without bearing any fixed rate of dividend.

In simple words, a company that has raises funds mostly by equity share is low geared while a company which has secured substantial proportion of its long term funds by the issue of preference shares, bonds, and debentures is highly geared.