Degearing is a financial term used to describe the process of reducing or eliminating a company's debt or financial leverage. It refers to the action taken by a company to decrease its debt level in order to increase its financial stability and decrease risks associated with borrowing.
Typically, degearing involves restructuring the company's capital structure, which may include activities such as refinancing existing debt, paying off loans, or issuing new equity. The goal is to lower the company's overall debt-to-equity ratio, making it less exposed to interest rate fluctuations and better positioned to withstand economic downturns.
Degearing can have several benefits for a company. Firstly, it reduces the company's interest expenses, allowing it to allocate more funds towards productive investments. Secondly, it enhances the company's creditworthiness, leading to improved relationships with lenders, lower borrowing costs, and increased access to capital. Furthermore, degearing can enhance shareholder value by reducing financial risks and increasing the company's ability to generate profits.
However, degearing is not without its drawbacks. It may require the company to divert significant financial resources towards debt repayment, limiting its ability to pursue growth opportunities or pay dividends. Additionally, degearing may result in dilution of existing shareholders' ownership if new equity is issued to reduce debt.
Overall, degearing is a strategic financial move aimed at reducing a company's debt burden and improving its financial resilience.
