DEFINITION of 'Total DebttoCapitalization Ratio'
An indicator that measures the total amount of debt in a company’s capital structure. The totaldebttocapitalization ratio is a gauge of a company’s financial leverage, and is calculated as:
Leverage can be a doubleedged sword for a company. While a high totaldebttocapitalization ratio can increase shareholders’ return on equity because of the tax deductibility of interest payments, a higher proportion of debt reduces a company’s financial flexibility and increases the risk of insolvency. A lower debttocapitalization ratio may be preferable for most companies in order to keep the debt burden within easily manageable levels.
INVESTOPEDIA EXPLAINS 'Total DebttoCapitalization Ratio'
For example, consider company ABC with shortterm debt of $10 million, longterm debt of $30 million, and shareholders’ equity of $60 million. The company’s totaldebttocapitalization ratio would be computed as follows:
Total Debt to Capitalization = ($10 + 30) / ($10 + $30 + $60) = 0.4 or 40%.
This ratio indicates that 40% of the company’s capital structure consists of debt.
Now consider the capital structure of company XYZ, which has shortterm debt of $5 million, longterm debt of $20 million, and shareholders’ equity of $15 million. Its totaldebttocapitalization ratio would be computed as follows:
Total Debt to Capitalization = ($5 + 20) / ($5 + $20 + $15) = 0.625 or 62.5%.
Thus, although XYZ has a lower absolute level of total debt ($25 million versus $40 million), debt comprises a significantly larger part of its capital structure. In the event of an economic downturn, XYZ may have a difficult time making the interest payments on its debt.
The acceptable level of total debt for a company depends on the industry in which it operates. While companies in capitalintensive sectors like utilities, pipelines, and telecommunications are typically highly leveraged, their cash flows have a greater degree of predictability than companies in other sectors that are exposed to the economy’s cyclical fluctuations.

Leverage Ratio
Any ratio used to calculate the financial leverage of a company ... 
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 ... 
Degree Of Financial Leverage  ...
A ratio that measures the sensitivity of a company’s earnings ... 
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 ...

What are some strategies companies commonly use to reduce their debt to capital ratio?
Companies can take steps to reduce and improve their debt to capital ratios. Among the strategies that can be employed are ... Read Full Answer >> 
When does the fixed charge coverage ratio suggest that a company should stop borrowing ...
Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >> 
What is the difference between the return on total assets and an interest rate?
Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >> 
How can EV/EBITDA be used in conjunction with the P/E ratio?
Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >> 
How can a company reduce the unsystematic risk of its own security issues?
Companies can reduce the unsystematic risk of their own security issues simply by doing the most effective job possible of ... 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 >>

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
Analyze Investments Quickly With Ratios
Make informed decisions about your investments with these easy equations. 
Home & Auto
Leveraging Leverage For Bigger Profits
Leverage is like fire. Find out how to use it to heat up your investing without burning your portfolio. 
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 ... 
Investing Basics
The Optimal Use Of Financial Leverage In A Corporate Capital Structure
The amount of debt and equity that makes up a company's capital structure has many risk and return implications. 
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
Leverage: What It Is And How It Works
Leverage is an investment strategy of using borrowed money to generate outsized investment returns. Before getting into greater detail on how leverage works in an investment context, it is useful ... 
Forex Education
Forex Leverage: A DoubleEdged Sword
Find out how this flexible and customizable tool magnifies both gains and losses. 
Credit & Loans
Debt Ratios
Learn about the debt ratio, debtequity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.