Debt-To-Capital Ratio

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DEFINITION of 'Debt-To-Capital Ratio'

A measurement of a company's financial leverage, calculated as the company's debt divided by its total capital. Debt includes all short-term and long-term obligations. Total capital includes the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest and net debt.

Calculated as:

 

Debt-To-Capital Ratio

 

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BREAKING DOWN 'Debt-To-Capital Ratio'

Companies can finance their operations through either debt or equity. The debt-to-capital ratio gives users an idea of a company's financial structure, or how it is financing its operations, along with some insight into its financial strength. The higher the debt-to-capital ratio, the more debt the company has compared to its equity. This tells investors whether a company is more prone to using debt financing or equity financing. A company with high debt-to-capital ratios, compared to a general or industry average, may show weak financial strength because the cost of these debts may weigh on the company and increase its default risk.

Because this is a non-GAAP measure, in practice, there are many variations of this ratio. Therefore, it is important to pay close attention when reading what is or isn't included in the ratio on a company's financial statements.

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RELATED FAQS
  1. What are financial risk ratios and how are they used to measure risk?

    Some of the financial ratios that are most commonly used by investors and analysts to assess a company's financial risk level ... Read Full Answer >>
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    The debt to capital of a company changes when it issues new shares of stock by decreasing its amount of total debt in relation ... Read Full Answer >>
  3. 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 >>
  4. How can I use the debt-to-capital ratio to evaluate a stock?

    The debt to capital ratio is a leverage ratio that can be used to evaluate a company's financial soundness and potential ... Read Full Answer >>
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    Even though a company has a high debt to capital ratio, it may not necessarily be a bad investment. Other equity evaluation ... Read Full Answer >>
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