What does the term 'gearing' refer to in accounting?

The term 'gearing' in accounting specifically refers to the debt to equity ratio. This ratio measures the extent to which a company is financed by debt compared to its shareholders' equity. A high gearing ratio indicates that a company relies more on debt to fund its operations, which can imply higher financial risk, especially in times of economic downturns. Conversely, a lower gearing ratio suggests that a company is less dependent on borrowed funds, which may indicate a more stable financial position.

Understanding gearing is important because it provides insights into the capital structure of a company and its risk profile. This knowledge aids stakeholders in making informed decisions about investing in or lending to the company.

The other options, such as cash flow management, the ratio of income to expenses, and the assets versus liabilities ratio, relate to other aspects of financial management and analysis but do not specifically define gearing as it is understood in accounting. Each of these terms plays a distinct role in financial assessment but does not encapsulate the concept of gearing in the context of debt and equity.