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.
INVESTOPEDIA EXPLAINS '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.

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
A measure of financial risk that determines the proportion of ... 
Debt Ratio
A financial ratio that measures the extent of a company’s or ... 
Debt/Equity Ratio
A measure of a company's financial leverage calculated by dividing ... 
Fundamental Analysis
A method of evaluating a security that entails attempting to ...

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 >> 
If a company has a high debt to capital ratio, what else should I look at before ...
A variety of equity valuation metrics can be utilized to evaluate a company along with the debt to capital ratio to get a ... Read Full Answer >> 
How can a firm bring down its operating leverage?
A company with a lower percentage of fixed costs and a higher percentage of variable costs uses less operating leverage. ... Read Full Answer >> 
What is the longterm outlook of the banking sector?
The longterm outlook of the banking sector remains cyclical, but with less volatility than in the past. Given structural ... Read Full Answer >> 
What are the biggest risks involved with financial spread betting?
Financial spread betting is a type of financial derivatives product used to speculate the price movements of a security. ... Read Full Answer >> 
What is the difference between a drawdown magnitude and drawdown duration?
Drawdown magnitude refers to an amount of money, while drawdown duration is in reference to a period of time. Drawdown is ... Read Full Answer >>

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
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 ... 
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.