Capital gearing and operational gearing will therefore affect the level of profit that will be earned, and the returns that shareholders will expect on their investment. A balance has to be struck between low cost but risky debt and high cost but flexible shareholders' funds. Operational gearing characteristics will influence this balance as low capital gearing can compensate for high operational gearing and vice versa.

Profitability

The ability of the company to generate profit from its use of the money invested in it is clearly a fundamental concern. This is measured by comparing the profit earned with the capital employed or 'Return on Capital Employed' (ROCE). However, return on capital can be achieved by quite different approaches to business.

High technology, Capital Intensive company will have a large capital investment in relation to the value of the products which it sells each year, but it will compensate for this by being able to earn a large element of profit on each sale it makes. At the other end of the scale a high volume retail operation has much less capital invested compared to the value of its annual sales, but can only earn a small profit on each sale.

Liquidity

In the short term the most imminent risk is the threat of the company running out of cash to pay its bills. If a company cannot pay its bills as they fall due (i.e. it lacks liquidity or has a 'cash flow crisis'), its creditors can take action to put the company into the hands of administrators who could liquidate it.