Answers the Question
Relatively speaking, how much debt does the company have?
Calculator for Debt to Capitalization Ratio
What Is the Debt to Capitalization Ratio?
The debt to capitalization ratio is a non-GAAP measure used to understand a firm's preference for selling shares vs. taking on additional debt.
It is also known as:
- Debt to capital ratio
- D/C ratio
Why Is it Important?
- All things being equal, a preference for taking on debt will lead to a more financially weakened state. This is because there is an expectation that the debt will have to be paid back.
Formula(s) to Calculate Debt to Capitalization Ratio
- DEBT TO CAPITALIZATION RATIO = (SHORT TERM DEBT + LONG TERM DEBT) / (SHORT TERM DEBT + LONG TERM DEBT + SHAREHOLDER EQUITY)
- Some practitioners calculate the aggregate debt differently, leading to differing ratios for the same company.
- Companies can manipulate the number of outstanding shares to massage the debt to capitalization ratio.