Long Term Debt to Capitalization Ratio

Long Term Debt to Capitalization Ratio provides an indication of the financial leverage of a company, one factor in assessing the total risk and allowing comparison to other companies in the same industry.

Long Term Debt to Capitalization Ratio

Long Term Debt to Capitalization Ratio provides an indication of the financial leverage of a company, one factor in assessing the total risk and allowing comparison to other companies in the same industry.

 


Long Term Debt to Capitalization Ratio Formula

The Long Term Debt to Capitalization Ratio is calculated by dividing the long term debt with the total capital available of a company. The long term debt, preferred stock and common stock together would contribute as the total capital of the company.



Interpretation of Long Term Debt to Capitalization Ratio

Long Term Debt to Capitalization Ratio is useful in that it allows the investors to assess the risk of investing in a particular company.  Companies that fund a greater portion of capital through debts are considered riskier than those with lower finance ratios.

A Long Term Debt to Capitalization Ratio greater than 1.0 indicates that the company has more debts than capital with potential for financial problems. A decrease in the Long Term Debt to Capitalization Ratio signals that there is an increase in the stock holder’s equity.


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