What Does Debt-to-Capital Ratio Mean?
A measure of a company's financial leverage calculated by dividing the company's total capital by its debt. Debt includes all short-term and long-term obligations. Total capital includes the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest, and net debt. It is calculated as follows:
Investopedia explains Debt-to-Capital Ratio
Companies finance their operations through either debt or equity. The debt-to-capital ratio reveals a company's financial structure, the way it is financing its operations, and its overall financial strength. The higher the debt-to-capital ratio, the more debt the company has compared to its equity. This tells investors whether a company is more prone to using debt financing or equity financing. A company with high debt-to-capital ratios compared with its industry peers shows weak financial strength because the cost of those debts may weigh on the company and increase its risk of default. Because this is a non-GAAP measure, in practice, there are many variations of this ratio. Therefore, it is important to pay close attention when reading what is or is not included in the ratio on a company's financial statements.
Related Terms:
• Acid-Test Ratio
• Capital Structure
• Debt/Equity Ratio
• Leverage
• Long-Term Debt
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