Which formula calculates gearing?

The formula for calculating gearing focuses on assessing the proportion of a company's financing that comes from debt compared to its equity. The correct formula, which is represented by the chosen answer, is derived from measuring non-current liabilities against the combined total of equity and non-current liabilities.

This is particularly significant in understanding a company's financial risk, as high gearing implies a higher reliance on debt financing, which may affect an organization's ability to survive during economic downturns. The calculation shows what percentage of the company's capital structure is funded by debt, indicating the leverage used by the business.

Gearing ratios are essential for investors and analysts as they provide insights into the company's financial stability and risk profile. Therefore, the calculation using non-current liabilities divided by the sum of equity and non-current liabilities offers a clear picture of the company's long-term financial obligations relative to its financing structure, making it a critical metric in financial analysis.