Gearing Proportion

Gearing Proportion

Gearing, the proportion of a company's annual income allocated to 'prior charges' (interest on debentures and preference dividends), the remainder going to the ordinary shareholders. Where it is high the company is said to he highly geared, and conversely. The higher the gearing the larger the likelihood of large fluctuations in ordinary share dividends. If out of i million profits, £990,000 is payable in prior charges, a i per cent increase in profits will double the amount available for distribution to ordinary shareholders; a I per cent decrease would reduce it to nil.

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