Debt-to-Capital Ratio: Definition, Formula, and Example (2024)
What Is the Debt-To-Capital Ratio?
The debt-to-capital ratio is a measurement of a company's financial leverage. The debt-to-capital ratio is calculated by taking the company's interest-bearing debt, both short- and long-term liabilities and dividing it by the total capital. Total capital is all interest-bearing debt plus shareholders' equity, which may include items such as common stock, preferred stock, and minority interest.
Key Takeaways
Measurement of a company's financial leverage, calculated by taking the company's interest-bearing debt and dividing it by total capital.
All else equal, the higher the debt-to-capital ratio, the riskier the company.
While most companies finance their operations through a mixture of debt and equity, looking at the total debt of a company may not provide the best information.
The debt-to-capital ratio gives analysts and investors a better idea of a company'sfinancial structureand whether or not the company is a suitable investment. All else being equal, the higher the debt-to-capital ratio, the riskier the company. This is because a higher ratio, the more the company is funded by debt than equity, which means a higher liability to repay the debt and a greater risk of forfeiture on the loan if the debt cannot be paid timely.
However, while a specific amount of debt may be crippling for one company, the same amount could barely affect another. Thus, using total capital gives a more accurate picture of the company's health because it frames debt as a percentage of capital rather than as a dollar amount.
Example of How to Use Debt-To-Capital Ratio
As an example, assume a firm has $100 million in liabilities comprised of the following:
Notes payable $5 million
Bonds payable $20 million
Accounts payable $10 million
Accrued expenses $6 million
Deferred income $3 million
Long-term liabilities $55 million
Other long-term liabilities $1 million
Of these, only notes payable, bonds payable, and long-term liabilities are interest-bearing securities, the sum of which total $5 million + $20 million + $55 million = $80 million.
As for equity, the company has $20 million worth of preferred stock and $3 million of minority interest listed on the books. The company has 10 million shares of common stock outstanding, which is currently trading at $20 per share. Total equity is $20 million + $3 million + ($20 x 10 million shares) = $223 million. Using these numbers, the calculation for the company's debt-to-capital ratio is:
Debt-to-capital = $80 million / ($80 million + $223) = $80 million / $303 million = 26.4%
Assume this company is being considered as an investment by a portfolio manager. If the portfolio manager looks at another company that had a debt-to-capital ratio of 40%, all else equal, the referenced company is a safer choice since its financial leverage is approximately half that of the compared company's.
As a real-life example, consider Caterpillar (NYSE: CAT), which has $36.6 billion in total debt as of December 2018. Its shareholders’ equity for the same quarter was $14 billion. Thus, its debt-to-capital ratio is 73%, or $36.6 billion / ($36.6 billion + $14 billion).
The Difference Between Debt-To-Capital Ratio and Debt Ratio
Unlike the debt-to-capital ratio, the debt ratio divides total debt by total assets. The debt ratio is a measure of how much of a company’s assets are financed with debt. The two numbers can be very similar, as total assets are equal to total liabilities plus total shareholder’ equity. However, for the debt-to-capital ratio, it excludes all other liabilities besides interest-bearing debt.
Limitations of Using Debt-To-Capital Ratio
The debt-to-capital ratio may be affected by the accounting conventions a company uses. Often, values on a company's financial statements are based on historical cost accounting and may not reflect the true current market values. Thus, it is very important to be certain the correct values are used in the calculation, so the ratio does not become distorted.
The debt-to-capital ratio is calculated by taking the company's interest-bearing debt, both short- and long-term liabilities and dividing it by the total capital. Total capital is all interest-bearing debt plus shareholders' equity, which may include items such as common stock, preferred stock, and minority interest.
The debt-to-capital ratio (D/C ratio) measures the financial leverage of a company by comparing its total liabilities to total capital. In other words, the debt-to-capital ratio formula measures the proportion of debt that a business uses to fund its ongoing operations as compared with capital.
Let's say you have 600,000$ in total assets and 150,000$ in liabilities. To calculate the debt ratio, divide the liability (150,000$ ) by the total assets (600,000$ ). This results in a debt ratio of 0.25 or 25 percent.
The Debt to Equity ratio (also called the “debt-equity ratio”, “risk ratio”, or “gearing”), is a leverage ratio that calculates the weight of total debt and financial liabilities against total shareholders' equity.
For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent.
The capitalization ratio formula consists of dividing a company's total debt by its total capitalization, which is the sum of its total debt and total equity.
A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.
According to HubSpot, a good debt-to-equity ratio sits somewhere between 1 and 1.5, indicating that a company has a pretty even mix of debt and equity. A debt to total capital ratio above 0.6 usually means that a business has significantly more debt than equity.
Suppose a Company XYZ Ltd. has total liabilities of Rs 3,000 crore. It has shareholders equity of Rs 15,000 crore. Using the Debt to Equity Ratio formula, you get: Debt to Equity Ratio = 3,000 / 15,000 = 0.2.
For example, say you have two credit cards with a combined credit limit of $10,000.If you owe $4,000 on one card and $1,000 on the other for a combined total of $5,000, your debt-to-credit ratio is 50 percent.
Read our editorial guidelines here . Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”
Add up your monthly debt payments (rent/mortgage payments, student loans, auto loans and your monthly minimum credit card payments). Find your gross monthly income (your monthly income before taxes). Debt-to-income ratio = your monthly debt payments divided by your gross monthly income.
Ratios compare two numbers, usually by dividing them. If you are comparing one data point (A) to another data point (B), your formula would be A/B. This means you are dividing information A by information B. For example, if A is five and B is 10, your ratio will be 5/10.
How to Calculate the Loan-to-Value Ratio. An LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. For example, if you buy a home appraised at $100,000 for its appraised value, and make a $10,000 down payment, you will borrow $90,000.
According to HubSpot, a good debt-to-equity ratio sits somewhere between 1 and 1.5, indicating that a company has a pretty even mix of debt and equity. A debt to total capital ratio above 0.6 usually means that a business has significantly more debt than equity.
To calculate cost of debt before taxes, divide the total interest of all your loans by the total debt of all your loans. To calculate cost of debt after your interest-based tax break, multiply your effective interest rate by your effective tax rate subtracted from one.
The Total Capital Ratio (“TCR”) is defined as TCR = Total Capital / Risk Weighted Assets: Total Capital is the total of the Bank's eligible Capital and Reserves; Risk Weighted Assets are the credit institution's assets or off-balance sheet exposures weighted according to risk.
Introduction: My name is Mr. See Jast, I am a open, jolly, gorgeous, courageous, inexpensive, friendly, homely person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
:max_bytes(150000):strip_icc()/TermDefinitions_Debt-to-CapitalRatio-c25b169207f64c2d8759194ba8be3aa9.jpg "Debt-to-Capital Ratio: Definition, Formula, and Example (1)")
