Gearing refers to the amount of debt compared to equity; higher debt levels increase financial risk due to fixed interest payments.
Financial risk is associated with the level of borrowing or debt a firm has, which increases when a company takes on debt.
Economic changes can significantly affect business risk, as some sectors are more sensitive to economic fluctuations than others.
Cash flow variability can be measured by analyzing the fluctuations in a company's cash flows and profit before interest and tax over time.
Comparing gearing ratios helps assess a company's financial risk relative to industry averages and historical performance.
Business risk relates to the variability of a firm's cash flows and profit before interest and tax, affecting every business regardless of size.
Operating gearing relates to the proportion of fixed costs in a business; high fixed costs lead to higher operational risk during downturns.
High operating gearing indicates that a company has a larger proportion of fixed costs, increasing its risk during periods of low sales.
Higher levels of debt can lead to greater EPS volatility, as fixed interest payments must be met regardless of profit fluctuations.
The two types of gearing ratios are equity to debt ratio and total gearing ratio, which measure the proportion of debt in relation to equity and total capital, respectively.
Industry average ratios provide a benchmark for assessing a company's performance and risk relative to its peers.
Factors influencing business risk include cash flow sensitivity, asset liquidity, and the ability to generate cash quickly.
