1. Debt Ratios: Introduction
  2. Debt Ratios: Overview Of Debt
  3. Debt Ratios: The Debt Ratio
  4. Debt Ratios: Debt-Equity Ratio
  5. Debt Ratios: Capitalization Ratio
  6. Debt Ratios: Interest Coverage Ratio
  7. Debt Ratios: Cash Flow To Debt Ratio

The capitalization ratio measures the debt component of a company's capital structure, defined as the mix of debt (liabilities) and shareholder’s equity on the company’s balance sheet. This is the means that the company uses to finance its operations and any capital spending.

Debt vs. Equity

Debt and equity are the two main methods a company can use to finance its operations.

Debt has some advantages. Interest payments are tax deductible. Debt also doesn’t dilute ownership of the firm like issuing additional stock does. When interest rates are low, access to the debt markets is easy and there is money available to lend.

Debt can be long-term or short-term and can consist of bank loans of the issuance of bonds.

Equity can be more expensive than debt. Raising additional capital by issuing more stock can dilute ownership in the company. On the other hand, equity doesn’t have to be paid back.

A company with too much debt may find its freedom of action restricted by its creditors and/or have its profitability hurt by high interest costs. The worst of all scenarios is having trouble meeting operating and debt liabilities on time during adverse economic conditions. Lastly, a company in a highly competitive business, if hobbled by high debt, will find its competitors taking advantage of its problems to grab more market share.

The capitalization ratio is one of the more meaningful debt ratios because it focuses on the relationship of debt liabilities as a component of a company's total capital base, which is the capital raised by shareholders and lenders.


Debt Ratios: Interest Coverage Ratio
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