Capitalization Ratio

Key Question

How balanced is your capital structure?

Capitalisation Ratio-2

The capitalization ratio measures the debt component of a company’s capital structure, or capitalization (i.e.┬áthe sum of long-term debt liabilities and shareholders’ equity) to support a company’s operations and growth.

Long-term debt is divided by the sum of long-term debt and shareholders’ equity. This ratio is considered to be one of the more meaningful of the “debt” ratios – it delivers the key insight into a company’s use of leverage.

There is no right amount of debt. Leverage varies according to industries, a company’s line of business and its stage of development. Nevertheless, common sense tells us that low debt and high equity levels in the capitalization ratio indicate investment quality.

Formula:
Capitalization Ratio = Long Term Debt / (Long Term Debt + Shareholders Equity)

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