Thin capitalisation

A company is said to be thinly capitalised when the level of its debt is much greater than its equity capital, i.e. its gearing, or leverage, is very high. An entity's debt-to-equity funding is sometimes expressed as a ratio. For example, a gearing ratio of 1.5:1 means that for every $1 of equity the entity has $1.5 of debt.

A high gearing ratio can create problems for:

• creditors, which bear the solvency risk of the company, and
• revenue authorities, which are concerned about excessive interest claims.