What does the term "gearing" mean in finance?

Gearing in finance specifically refers to the degree to which a company is financed by debt relative to its equity. It provides insights into the risks associated with a company's capital structure; higher levels of debt compared to equity indicate higher financial risk since debt obligations must be met regardless of the company's financial performance. Investors and analysts often examine gearing ratios, such as debt-to-equity or debt-to-assets, to evaluate the financial leverage and stability of a business. A company with high gearing may have increased potential for returns, but also faces greater risk during downturns when revenue may fall and servicing debt becomes challenging.

The other options address different financial concepts. The ratio of equity to total liabilities reflects a specific capital structure measure, while balancing cash flow and liabilities typically pertains to liquidity rather than gearing. The overall profitability of a company relates to its performance metrics, which do not directly pertain to the concept of gearing. Thus, understanding gearing in terms of debt versus equity is crucial for assessing financial risk and leverage in a firm's capital structure.