debttocapitalization

Debttocapitalization, or debt-to-capitalization, is a financial metric used to assess a company’s leverage by comparing its interest-bearing debt to its total capitalization. The ratio is calculated as Total Debt divided by (Total Debt plus Shareholders’ Equity). It is designed to indicate how much of a company’s financing comes from debt relative to equity.

Variations exist in what counts as debt and what counts as capitalization. Debt may include short-term borrowings, long-term debt, and capital leases, while capitalization can include or exclude preferred equity. Analysts typically use consolidated balance sheet figures and may compute the metric at a specific date or as an average over multiple periods.

Interpreting the ratio, a higher debt-to-capitalization suggests greater leverage and potentially higher financial risk, especially in adverse economic conditions or with rising interest rates. The metric is used by lenders, credit rating agencies, and investors to gauge creditworthiness and to benchmark peers or industries. It is also relevant for evaluating changes in capital structure over time.

Limitations should be noted. The ratio omits off-balance-sheet liabilities and depends on the chosen definitions of debt and capitalization, which can materially affect results. It can also be distorted by share repurchases, which reduce equity, or by differences in accounting treatment across companies or jurisdictions.

Example: a company with $80 million in debt and $320 million in equity has total capitalization of $400 million, yielding a debt-to-capitalization ratio of 20%.