DEFINITION of 'Capitalization Ratios'
Indicators that measure the proportion of debt in a company’s capital structure. Capitalization ratios include the debtequity ratio, longterm debt to capitalization ratio and total debt to capitalization ratio. The formula for each of these ratios is shown below.
 DebtEquity ratio = Total Debt / Shareholders' Equity
 Longterm Debt to Capitalization = LongTerm Debt / (LongTerm Debt + Shareholders’ Equity)
 Total Debt to Capitalization = Total Debt / (Total Debt + Shareholders' Equity)
While a high capitalization ratio can increase the return on equity because of the tax shield of debt, a higher proportion of debt increases the risk of bankruptcy for a company.
Also known as leverage ratios.
BREAKING DOWN 'Capitalization Ratios'
For example, consider a company with shortterm debt of $5 million, longterm debt of $25 million and shareholders’ equity of $50 million. The company’s capitalization ratios would be computed as follows –
 DebtEquity ratio = ($5 million + 25 million) / 50 million = 0.60 or 60%
 Longterm Debt to Capitalization = $25 million / ($25 million + $50 million) = 0.33 or 33%
 Total Debt to Capitalization = ($5 million + $25 million) / ($5 million + $25 million + $50 million) = 0.375 or 37.5%
The acceptable level of capitalization ratios for a company depends on the industry in which it operates. Companies in sectors such as utilities, pipelines and telecommunications – which are capital intensive and have predictable cash flows – will typically have capitalization ratios on the higher side. Conversely, companies with relatively few assets that can be pledged as collateral – in sectors like technology and retail – will have lower levels of debt and therefore lower capitalization ratios.
The acceptable level of debt for a company is dependent on its whether its cash flows are adequate to service such debt. The interest coverage ratio, another popular leverage ratio, measures the ratio of a company’s earnings before interest and taxes (EBIT) to its interest expense. A ratio of 2, for instance, indicates the company generates $2 for every dollar in interest expense.
As with all ratios, a company’s capitalization ratios should be tracked over time to identify if they are stable. They should also be compared with similar ratios of peer companies, to ascertain the company’s leverage position relative to its peers.

Debt Ratio
A financial ratio that measures the extent of a company’s or ... 
Debt/Equity Ratio
Debt/Equity Ratio is debt ratio used to measure a company's financial ... 
Funds From Operations (FFO) To ...
A leverage ratio that a credit rating agency or an investor can ... 
Cash FlowtoDebt Ratio
A ratio of a company’s cash flow from operations to its total ... 
Total Debt To Total Assets
Total Debt To Total Assets is a measure of financial risk that ... 
Fundamental Analysis
A method of evaluating a security that entails attempting to ...

Fundamental Analysis
Financial Analysis: Solvency Vs. Liquidity Ratios
Solvency and liquidity are equally important for a company's financial health. A number of financial ratios are used to measure a company’s liquidity and solvency, and an investor should use ... 
Investing Basics
Will Corporate Debt Drag Your Stock Down?
Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference. 
Fundamental Analysis
Analyzing Investments With Solvency Ratios
Solvency ratios are extremely useful in helping analyze a firm’s ability to meet its longterm obligations; but like most financial ratios, they must be used in the context of an overall company ... 
Bonds & Fixed Income
Evaluating A Company's Capital Structure
Learn to use the composition of debt and equity to evaluate balance sheet strength. 
Fundamental Analysis
4 Leverage Ratios Used In Evaluating Energy Firms
These four leverage ratios can help investors understand how oil and gas firms are managing their debt. 
Fundamental Analysis
An Introduction To Coverage Ratios
Interest coverage ratios help determine a company's ability to pay down its debt. 
Investing Basics
Understanding Leverage Ratios
Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios  including the debt, ... 
Investing Basics
How To Find P/E And PEG Ratios
If these numbers have you in the dark, these easy calculations should help light the way. 
Active Trading
Blending Technical And Fundamental Analysis
Find out how you can combine the best of both strategies to better understand the markets. 
Credit & Loans
Debt Ratios
Learn about the debt ratio, debtequity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.

What are the different capitalization ratios?
Capitalization ratios are ratios that measure the amount of debt a company has in relation to its capital structure, or capitalization. ... Read Full Answer >> 
What does a futures contract cost?
The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >> 
Are there leveraged ETFs that follow the retail sector?
There are many exchangetraded funds (ETFs) that track the retail sector or elements of the retail sector, and some of those ... Read Full Answer >> 
What are some common cashdebt strategies that occur during a spinoff?
Cashdebt strategies that are commonly used to in a spinoff to enable the parent company to monetize the spinoff are debt/equity ... Read Full Answer >> 
What are the similarities and differences between the savings and loan (S&L) crisis ...
The savings and loan crisis and the subprime mortgage crisis both began with banks creating new profit centers following ... Read Full Answer >> 
How can I determine the degree of financial leverage (DFL) for a particular company?
Fundamental analysis uses the degree of operating leverage (DFL) to determine the sensitivity of a company's earnings per ... Read Full Answer >>