Which ratio measures the proportion of capital raised by debt and equity in a business?

The gearing ratio is specifically designed to measure the proportion of a company's capital that is financed through debt compared to equity. This ratio provides insight into the financial structure of a business, indicating how much of the company's capital comes from borrowed funds (debt) relative to the amount contributed by shareholders (equity). A high gearing ratio suggests that a larger portion of the capital is financed through debt, which can indicate higher financial risk, whereas a lower gearing ratio suggests a more balanced or conservative approach to financing.

In this context, liquidity ratios focus on a company's ability to meet short-term obligations, profitability ratios assess how well a company generates profit relative to its revenue, and efficiency ratios evaluate how well a company uses its assets to generate income. None of these ratios specifically address the mix of debt and equity funding, which is the core focus of the gearing ratio.