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Long Term Debt to Capitalization Ratio Calculator

Long-Term Debt to Capitalization Ratio Calculator

Long-Term Debt to Capitalization Ratio Calculator

Measure the proportion of a company's long-term capital that comes from debt

Capital Structure Information
Capital Structure Results
LT Debt/Capitalization
-
ratio
Long-Term Debt ÷ (LT Debt + Equity)
Long-Term Debt
-
$
Loans, bonds, and obligations due >1 year
Total Equity
-
$
Share capital + Retained earnings
Calculate to see capital structure assessment
Capital Structure Analysis
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 - -
About This Ratio

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.

Improving Capital Structure

• Increase retained earnings

• Issue additional equity

• Pay down long-term debt

• Improve profitability

Warning Signs

• Ratio increasing over time

• Declining equity position

• High interest expenses

• Ratio above industry norms



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

Long-Term Debt to Capitalization Ratio=Long-Term DebtLong-Term Debt+Shareholders’ Equity×100%

Where:

  • Long-Term Debt = Loans, bonds, and obligations due beyond 1 year

  • Shareholders' Equity = Common stock + retained earnings + other equity


Example Calculation

Financial DataAmount ($M)
Long-Term Debt120
Shareholders' Equity180
Total Capitalization300 (120 + 180)
Ratio40% (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

  1. Long-Term Debt (from balance sheet):

    • Bank loans (>1 year)

    • Corporate bonds

    • Capital leases

    • Deferred tax liabilities

  2. 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

IndustryTypical RangeReasoning
Utilities50-70%Stable cash flows support high debt
Technology10-30%Growth funded through equity
Manufacturing30-50%Moderate equipment financing
REITs60-75%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

RatioFormulaFocus
Debt-to-EquityTotal Debt ÷ Total EquityOverall leverage
Debt-to-CapitalDebt ÷ (Debt + Equity)Similar but includes short-term debt
Interest CoverageEBIT ÷ Interest ExpenseDebt 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! 💰📊