longbridge
Home
Trade
PortAI

What is Debt-To-Capital Ratio?

1856 reads · Last updated: December 5, 2024

The Debt-to-Capital Ratio is a financial metric used to measure the proportion of a company's total capital that is financed through debt. This ratio indicates the extent to which a company is using leverage and helps assess the company's financial risk and debt repayment capacity. The formula for calculating the Debt-to-Capital Ratio is:Debt-to-Capital Ratio = Total Debt/Total Capital​Where total debt includes both short-term and long-term debt, and total capital is the sum of total debt and shareholders' equity.Key characteristics of the Debt-to-Capital Ratio include:Financial Leverage: Indicates the level of debt financing a company is using, reflecting its financial leverage.Debt Repayment Capacity: Helps evaluate the company's ability to repay its debt in the future and the risk of financial distress.Capital Structure: Provides a basis for analyzing the company's capital structure, understanding the balance between equity and debt financing.Risk Assessment: A higher Debt-to-Capital Ratio may indicate higher financial risk, while a lower ratio suggests a more stable financial condition.

Definition

The Debt-to-Capital Ratio is a financial metric used to measure the proportion of debt in a company's capital structure. This ratio indicates the extent to which a company is financing its operations through debt rather than equity, serving as an important indicator of financial leverage and debt repayment ability. The formula for calculating the Debt-to-Capital Ratio is: Debt-to-Capital Ratio = Total Debt / Total Capital, where total debt includes both short-term and long-term debt, and total capital is the sum of total debt and shareholders' equity.

Origin

The Debt-to-Capital Ratio originated as a financial analysis tool in the mid-20th century, becoming widely used as corporate financing methods diversified and capital markets developed. It helps investors and managers better understand a company's capital structure and financial health.

Categories and Features

The main features of the Debt-to-Capital Ratio include:
Financial Leverage: Indicates the degree to which a company uses debt for financing, reflecting its level of financial leverage.
Debt Repayment Ability: Helps assess a company's ability to repay debt in the future and the risk of financial distress.
Capital Structure: Provides a basis for analyzing a company's capital structure, understanding the balance between equity and debt financing.
Risk Assessment: A higher Debt-to-Capital Ratio may indicate higher financial risk, while a lower ratio suggests a more stable financial condition.

Case Studies

Case Study 1: During the 2008 financial crisis, many companies faced financial distress due to high Debt-to-Capital Ratios. For example, Lehman Brothers' high leverage was one of the main reasons for its bankruptcy.
Case Study 2: Apple Inc. has maintained a low Debt-to-Capital Ratio throughout its development, which has allowed it to maintain strong financial stability and flexibility amid market fluctuations.

Common Issues

Common issues include:
Confusing the Debt-to-Capital Ratio with the Debt-to-Equity Ratio.
Ignoring industry average comparisons, leading to misjudgment of a company's financial condition.

Suggested for You

Refresh
buzzwords icon
Counterparty Risk
Counterparty risk refers to the risk in financial transactions that one party may fail to fulfill its contractual obligations. This type of risk is prevalent in credit, investment, and various trading activities and significantly impacts the decision-making of financial institutions and investors.
1 K learned

Counterparty Risk

Counterparty risk refers to the risk in financial transactions that one party may fail to fulfill its contractual obligations. This type of risk is prevalent in credit, investment, and various trading activities and significantly impacts the decision-making of financial institutions and investors.

buzzwords icon
Price-Weighted Index
A Price-Weighted Index is a type of stock index where the weight of each constituent company is proportional to its stock's price per share. The index is calculated by summing the prices of all the constituent stocks and dividing by the total number of constituent stocks. Consequently, higher-priced stocks have a more significant impact on the index.
1 K learned

Price-Weighted Index

A Price-Weighted Index is a type of stock index where the weight of each constituent company is proportional to its stock's price per share. The index is calculated by summing the prices of all the constituent stocks and dividing by the total number of constituent stocks. Consequently, higher-priced stocks have a more significant impact on the index.

buzzwords icon
Trailing 12 Months
Trailing 12 Months (TTM) is a financial term that measures a company's performance over the past 12 consecutive months. This calculation is not limited to the company's fiscal year and can provide more timely performance data, applicable for calculating various financial metrics such as earnings, Earnings Per Share (EPS), Price-to-Earnings Ratio (P/E), and yield.
4 K learned

Trailing 12 Months

Trailing 12 Months (TTM) is a financial term that measures a company's performance over the past 12 consecutive months. This calculation is not limited to the company's fiscal year and can provide more timely performance data, applicable for calculating various financial metrics such as earnings, Earnings Per Share (EPS), Price-to-Earnings Ratio (P/E), and yield.

buzzwords icon
Dividend Discount Model
The dividend discount model (DDM) is a quantitative method used for predicting the price of a company's stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value.It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and takes into consideration the dividend payout factors and the market expected returns. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued and qualifies for a buy, and vice versa.
3 K learned

Dividend Discount Model

The dividend discount model (DDM) is a quantitative method used for predicting the price of a company's stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value.It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and takes into consideration the dividend payout factors and the market expected returns. If the value obtained from the DDM is higher than the current trading price of shares, then the stock is undervalued and qualifies for a buy, and vice versa.

buzzwords icon
Compound Annual Growth Rate
The compound annual growth rate (CAGR) is the rate of return (RoR) that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.CAGR provides a concise way to assess the overall performance of an investment over a period of time, regardless of fluctuations over time. Although CAGR is a useful metric, it may not fully reflect the actual compounding effect over the period, especially when the ROI fluctuates greatly.
2 K learned

Compound Annual Growth Rate

The compound annual growth rate (CAGR) is the rate of return (RoR) that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.CAGR provides a concise way to assess the overall performance of an investment over a period of time, regardless of fluctuations over time. Although CAGR is a useful metric, it may not fully reflect the actual compounding effect over the period, especially when the ROI fluctuates greatly.

buzzwords icon
Fibonacci Retracement
Fibonacci retracement levels, stemming from the Fibonacci sequence, are horizontal lines that indicate where support and resistance are likely to occur. Each level is associated with a specific percentage, representing the degree to which the price has retraced from a previous move. Common Fibonacci retracement levels include 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels can be drawn between any two significant price points, such as a high and a low, to predict potential reversal areas. Fibonacci numbers are prevalent in nature, and many traders believe they hold significance in financial markets as well. Fibonacci retracement levels were named after the Italian mathematician Leonardo Pisano Bigollo, better known as Leonardo Fibonacci, who introduced these concepts to Western Europe but did not create the sequence himself.
4 K learned

Fibonacci Retracement

Fibonacci retracement levels, stemming from the Fibonacci sequence, are horizontal lines that indicate where support and resistance are likely to occur. Each level is associated with a specific percentage, representing the degree to which the price has retraced from a previous move. Common Fibonacci retracement levels include 23.6%, 38.2%, 50%, 61.8%, and 78.6%. These levels can be drawn between any two significant price points, such as a high and a low, to predict potential reversal areas. Fibonacci numbers are prevalent in nature, and many traders believe they hold significance in financial markets as well. Fibonacci retracement levels were named after the Italian mathematician Leonardo Pisano Bigollo, better known as Leonardo Fibonacci, who introduced these concepts to Western Europe but did not create the sequence himself.

© 2026 Longbridge｜Disclaimer