Long-Term Debt to Capitalization Ratio Calculator
Measure the proportion of a company's long-term capital that comes from debt
| Ratio Range | Interpretation | Your Ratio | Status |
|---|---|---|---|
| Below 0.3 | Conservative capital structure | - | - |
| 0.3 - 0.5 | Moderate capital structure | - | - |
| 0.5 - 0.7 | Aggressive capital structure | - | - |
| Above 0.7 | Highly leveraged structure | - | - |
The Long-Term Debt to Capitalization Ratio measures the percentage of a company's long-term capital that comes from debt. It shows how much the company relies on debt financing versus equity financing for its long-term operations.
• Increase retained earnings
• Issue additional equity
• Pay down long-term debt
• Improve profitability
• Ratio increasing over time
• Declining equity position
• High interest expenses
• Ratio above industry norms
A Long-Term Debt to Capitalization Ratio Calculator helps investors and analysts measure what percentage of a company's permanent capital comes from long-term debt versus equity. This critical financial ratio reveals a company's leverage and financial risk profile.
How the Calculator Works
Formula
Where:
Long-Term Debt = Loans, bonds, and obligations due beyond 1 year
Shareholders' Equity = Common stock + retained earnings + other equity
Example Calculation
| Financial Data | Amount ($M) |
|---|---|
| Long-Term Debt | 120 |
| Shareholders' Equity | 180 |
| Total Capitalization | 300 (120 + 180) |
| Ratio | 40% (120 ÷ 300 × 100) |
Interpretation:
< 30%: Conservative capital structure
30-50%: Balanced approach
> 50%: Aggressive leverage (common in utilities/REITs)
> 70%: Potentially dangerous debt levels
Key Inputs Required
Long-Term Debt (from balance sheet):
Bank loans (>1 year)
Corporate bonds
Capital leases
Deferred tax liabilities
Shareholders' Equity:
Common stock
Preferred stock
Retained earnings
Treasury stock (subtracted)
Why This Ratio Matters
✅ Capital Structure Analysis - Shows debt/equity mix
✅ Credit Risk Assessment - Lenders set covenants based on this
✅ Investment Decisions - Helps compare companies within sectors
✅ Financial Flexibility - Low-ratio companies can borrow in crises
Industry Benchmarks
| Industry | Typical Range | Reasoning |
|---|---|---|
| Utilities | 50-70% | Stable cash flows support high debt |
| Technology | 10-30% | Growth funded through equity |
| Manufacturing | 30-50% | Moderate equipment financing |
| REITs | 60-75% | Tax-advantaged debt structures |
How to Improve the Ratio
✔ Debt Reduction - Use excess cash to pay down loans
✔ Equity Financing - Issue new shares to strengthen balance sheet
✔ Earnings Retention - Grow equity through profitability
✔ Asset Sales - Monetize non-core assets to reduce debt
Limitations
⚠ Ignores Interest Rates - Doesn't account for debt cost
⚠ Market Value Blind Spot - Uses book values, not market caps
⚠ Industry Variances - Useless for cross-sector comparisons
Related Ratios
| Ratio | Formula | Focus |
|---|---|---|
| Debt-to-Equity | Total Debt ÷ Total Equity | Overall leverage |
| Debt-to-Capital | Debt ÷ (Debt + Equity) | Similar but includes short-term debt |
| Interest Coverage | EBIT ÷ Interest Expense | Debt service ability |
When to Use This Ratio
Before investing in corporate bonds
When evaluating acquisition targets
During credit rating assessments
For capital budgeting decisions
Real-World Example: Walmart vs. Tesla (2023)
Walmart: 28% ratio ($44B debt ÷ $156B capitalization)
Tesla: 6% ratio ($5B debt ÷ $82B capitalization)
Analysis: Walmart's higher ratio reflects traditional retail financing
Final Thoughts
This ratio answers:
"What percentage of permanent capital comes from creditors rather than owners?"
Need help calculating yours? Share your debt and equity figures below! 💰📊