Debt-to-Capital Ratio: How to Calculate Debt-to-Capital Ratio

The debt-to-capital ratio is a financial metric that measures a company’s financial leverage by comparing its overall financial obligations to its total capital. A company’s debt-to-capital ratio is instrumental in providing a picture of its overall financial health. In raw numbers, it might appear that a particular business has a very high debt load, but in comparison to the business’s overall capital, the ratio may be well within the bounds of acceptable risk.

To find the debt-to-capital number, use the following ratio formula:

Debt-to-Capital Ratio = Debt/ Debt + Shareholder’s Equity

The company’s interest-bearing debt includes both short-term debt and long-term total liabilities. Overall capital is the denominator of the equation and includes the total amount of debt plus all shareholder equity, including common stock, preferred stock, and minority interest. All of this information should be available on the balance sheet of the company.

The debt-to-capital ratio is generally a better metric than simply totaling a company’s debt obligations, but it does have limitations. When deciding whether or not to invest or lend, consider the following limits of the debt-to-capital ratio:

1. 1. Comprehensiveness: To get a comprehensive sense of a company’s overall value as an investment, an analyst also considers the debt-to-asset ratio, which compares a company's debt obligations to the company's total assets, and the debt-to-equity ratio, which compares a company’s total liabilities with its shareholders' equity. These financial ratios, along with debt-to-capital, give insight into the big picture.
2. 2. Debt service: As a measure of leverage, the capital-to-debt ratio tends to favor companies and sectors that do not heavily rely on debt. Large, capital-intensive companies like electricity providers or other utilities have a large, stable customer base, meaning they have plenty of reliable income, even if they have to service a lot of short- and long-term debt. These companies are probably less susceptible to temporary shortfalls or downturns. Newer, rapidly-expanding companies could face the danger of a gradual leveling-off of sales or a shift in the market that might make higher debt service difficult or impossible.
3. 3. Accounting standards: As with any financial measurement, metrics for debt-to-capital ratios are not constant across different businesses and time periods. Accounting standards might vary, like when a company uses out-of-date means of measuring value on their financial statements. Sometimes, a company will include accounts in the overall debt. Getting the most up-to-date information is essential and may require some research and analysis.

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