capitalization ratio

Fin

the proportion of a company’s value represented by debt, stock, assets, and other items.

EXAMPLE

By comparing debt to total capitalization, these ratios provide a glimpse of a company’s long-term stability and ability to withstand losses and business downturns.

     A company’s capitalization ratio can be expressed in two ways:

= Long-Term Debt/Long-Term Debt + Owners’ Equity

and

= Total Debt/Total Debt + Preferred + Common Equity

For example, a company whose long-term debt totals $5,000 and whose owners hold equity worth $3,000 would have a capitalization ratio of:

5,000/(5,000 + 3,000) = 5,000/8,000 = 0.625 capitalization ratio

Both expressions of the ratio are also referred to as component percentages, since they compare a firm’s debt with either its total capital (debt plus equity) or its equity capital. They readily indicate how reliant a firm is on debt financing.

     Capitalization ratios need to be evaluated over time, and compared with other data and standards. Care should be taken when comparing companies in different industries or sectors. The same figures that appear to be low in one industry can be very high in another.