Total Debt-to-Capitalization Ratio

What is the 'Total Debt-to-Capitalization Ratio'

The total debt-to-capitalization ratio is an indicator that measures the total amount of debt in a company’s capital structure. The total-debt-to-capitalization ratio is a gauge of a company’s financial leverage, and is calculated as:

Leverage can be a double-edged sword for a company. While a high total-debt-to-capitalization 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 debt-to-capitalization ratio may be preferable for most companies in order to keep the debt burden within easily manageable levels.

BREAKING DOWN 'Total Debt-to-Capitalization Ratio'

For example, consider company ABC with short-term debt of $10 million, long-term debt of $30 million, and shareholders’ equity of $60 million. The company’s total-debt-to-capitalization 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 short-term debt of $5 million, long-term debt of $20 million, and shareholders’ equity of $15 million. Its total-debt-to-capitalization 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 capital-intensive 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.

RELATED TERMS
  1. Capitalization Ratios

    Indicators that measure the proportion of debt in a company’s ...
  2. Debt-To-Capital Ratio

    A measurement of a company's financial leverage, calculated as ...
  3. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Long-Term Debt To Capitalization ...

    A ratio showing the financial leverage of a firm, calculated ...
  6. Financial Risk

    The possibility that shareholders will lose money when they invest ...
Related Articles
  1. Investing

    What is the Debt-To-Capital Ratio?

    The debt-to-capital ratio is used to measure a company’s use of financial leverage. The ratio is the company’s total debt, divided by the sum of the company’s equity plus total debt.
  2. Investing

    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 company’s assets are funded by borrowing. In business, borrowing is also called leverage.
  3. Investing

    Debt Ratio

    The debt ratio divides a company’s total debt by its total assets to tell us how highly leveraged a company is—in other words, how much of its assets are financed by debt. The debt component ...
  4. Credit & Loans

    Debt Ratios: Capitalization Ratio

    By Richard Loth (Contact | Biography)The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and ...
  5. 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.
  6. Professionals

    Capital Structure

    This is an important concept in valuing a company.
  7. Bonds & Fixed Income

    Evaluating A Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  8. Economics

    Calculating Long-Term Debt to Total Assets Ratio

    A company’s long-term debt to total assets ratio shows the percentage of its assets that are financed with long-term debt.
  9. Active Trading Fundamentals

    Analyzing Oracle's Debt Ratios in 2016 (ORCL, SAP)

    Learn how the debt ratio, debt-to-equity ratio and debt-to-capital ratio are used to evaluate Oracle Corp.'s liabilities, equity and assets.
  10. Credit & Loans

    Debt Ratios: The Debt Ratio

    By Richard Loth (Contact | Biography)The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. ...
RELATED FAQS
  1. 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 >>
  2. How can I use the debt-to-capital 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 >>
  3. What are financial risk ratios and how are they used to measure risk?

    Explore some of the primary financial risk ratios that investors and analysts commonly use to evaluate a company's overall ... Read Answer >>
  4. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >>
  5. Which financial ratio best reflects capital structure?

    Learn about the debt-to-equity ratio and why this metric is widely considered the most useful reflection of a company's capital ... Read Answer >>
  6. Over what duration should I be evaluating a company's total debt to total assets ...

    Learn what duration to use when analyzing the total debt to total assets ratio in a company and how to track a company's ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center