What is the 'LongTerm Debt To Capitalization Ratio'
The longterm debt to capitalization ratio is a ratio showing the financial leverage of a firm, calculated by dividing longterm debt by the amount of capital available:
A variation of the traditional debttoequity ratio, this value computes the proportion of a company's longterm debt compared to its available capital. By using this ratio, investors can identify the amount of leverage utilized by a specific company and compare it to others to help analyze the company's risk exposure as generally, companies that finance a greater portion of their capital via debt are considered riskier than those with lower leverage ratios.
BREAKING DOWN 'LongTerm Debt To Capitalization Ratio'
The choice between using longterm debt and other forms of capital, namely preferred and common stock or categorically called equity, is a balancing act to build a financing capital structure with lower cost and less risk. Longterm debt can be advantageous if a company anticipates strong growth and ample profitability that can help ensure ontime debt repayments. Lenders collect only their due interest and do not participate in profit sharing among equity holders, making debt financing sometimes a preferred funding source. On the other hand, longterm debt may be risky when a company already struggles with its business, and the financial strain imposed by the debt burden may well lead to insolvency.Cost of Capital
Contrary to intuitive understanding, using longterm debt can actually help lower a company's total cost of capital. Borrowing terms are stipulated independent of a company's future business and financial performance. In other words, if a company turns out to be highly profitable, it does not need to pay the lender anything more than what the borrowing interest rate calls for and can keep the rest of the profits to itself. When a company's existing owners finance their capital with equity, they must share its available profits proportionately with all other equity holders. Although a company does not need to worry about returning capital to equity holders, the cost of using the safer equity capital is never cheap.
Financing Risk
When the amount of longterm debt relative to the sum of all capital has become a dominant funding source, it may increase financing risk. Longterm debt is often compared to something called debt service coverage to see by how many times total debt payments have exceeded a company's operating income or earnings before interest, tax, depreciation and amortization (EBITDA). The more that longterm debt has gone beyond EBITDA, the more uncertain if future debt payments may be fully covered. A balanced capital structure takes advantage of lowcost debt financing but also prevent the risk of a potential debt default.

LongTerm Debt
Longterm debt consists of loans and financial obligations lasting ... 
Capital Structure
A mix of a company's longterm debt, specific shortterm debt, ... 
Capitalization Ratios
Indicators that measure the proportion of debt in a companyâ€™s ... 
Leverage Ratio
Any ratio used to calculate the financial leverage of a company ... 
Debt Ratio
A financial ratio that measures the extent of a companyâ€™s or ... 
Long Term Debt To Total Assets ...
A measurement representing the percentage of a corporation's ...

Investing
Evaluating A Company's Capital Structure
Learn to use the composition of debt and equity to evaluate balance sheet strength. 
Investing
Target Corp: WACC Analysis (TGT)
Learn about the importance of capital structure when making investment decisions, and how Target's capital structure compares against the rest of the industry. 
Investing
Calculating LongTerm Debt to Total Assets Ratio
A companyâ€™s longterm debt to total assets ratio shows the percentage of its assets that are financed with longterm debt. 
Investing
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
Debt Ratio
The debt ratio divides a companyâ€™s total debt by its total assets to tell us how highly leveraged a company isâ€”in other words, how much of its assets are financed by debt. The debt component ... 
Small Business
Total Debt to Total Assets
Total Debt to total assets, also called the debt ratio, is an accounting measurement that shows how much of a companyâ€™s assets are funded by borrowing. In business, borrowing is also called leverage. 
Investing
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. 
Investing
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. 
Investing
4 Leverage Ratios Used In Evaluating Energy Firms
Analysts use specific leverage ratios to compare firms within an industry. A basic understanding of these ratios helps when evaluating oil and gas stocks. 
Investing
Understanding LongTerm Debt
Longterm debt is any debt or liability that is due in more than one year.

How can I use the debttocapital ratio to evaluate a stock?
Understand the significance of the debt to capital ratio of financial leverage, and learn how investors and analysts make ... Read Answer >> 
Which financial ratio best reflects capital structure?
Learn about the debttoequity ratio and why this metric is widely considered the most useful reflection of a company's capital ... Read Answer >> 
What are the different capitalization ratios?
Learn about capitalization ratios, three different ratios that measure debt in relation to capital structure and how to calculate ... Read Answer >> 
Which is more important when estimating cost of capital  debt or equity?
Learn about the relative costs of debt and equity and how they affect the overall cost of capital, including why debt may ... Read Answer >> 
What are the benefits and shortfalls of the HerfindahlHirschman Index?
Learn about the differences between equity and debt financing and how they impact financials. Find out how businesses determine ... Read Answer >> 
Does a high debt to capital ratio make a company a bad investment?
Understand the debt to capital ratio and why a high debt to capital ratio doesn't necessarily mean that a stock is a bad ... Read Answer >>