I admit I'm a beginner investor but am learning fast. However, a lot of companies seem to have negative gross/net gearing. Can anyone explain what this is and what it means?
I understand an ideal gearing of not more than 50% is good, more than 100% somewhat risky.
I understand negative gearing in relation to property.
But I don't know what it means - and can't find this out anywhere - when a company negatively gears.
Also - which is more important to look at gross or net gearing?
Many thanks in advance!
Gearing is defined along the lines of
NET: (Total borrowings - Cash (i.e. net debt)) / Tangible Equity
GROSS: (Total borrowings) / Tangible Equity
Tangible equity aka book value, shareholders equity,/funds, net assets or net tangible assets.
Stockos definitions are here.
Lets take one that may cause confusion: https://www.stockopedia.com/ratios/net-gearing-inc-pension-latest-5558 (Total Debt - Cash + Pension Deficit) / Book Value of Equity (incl. Goodwill and Intangibles)
The issue is that either the numerator and / or the denominator can be negative. Net cash is good (a negative numerator). Book value can be negative (which is very bad and without financing probably terminal). I don't think you will encounter both ... so now is the time for someone to point out historical examples :-)
So it is probably worth adding positive book value to screens which have any gearing measure. Then we can say that negative gearing is 'safer', everything else being equal.
As to gross versus net it depends on your view of cash.
BTW your tag is wrong. This is a fundamental analysis question.
