Debt-to-Capital Ratio Calculation Explained
How is the debt-to-capital ratio calculated?
The company has total interest-bearing debt of $1.7 million. If it has $800,000 in equity, then what is its debt-to-capital ratio?
Debt-to-Capital Ratio Calculation:
The debt-to-capital ratio is a financial ratio that measures a company's financial leverage, which is the amount of debt it has relative to its overall capital.
The formula for the debt-to-capital ratio is: Debt-to-Capital Ratio = Total Interest-Bearing Debt / (Total Interest-Bearing Debt + Total Equity)
In this case, the company has total interest-bearing debt of $1.7 million and total equity of $800,000.
Therefore, the debt-to-capital ratio would be calculated as follows:
Debt-to-Capital Ratio = $1.7 million / ($1.7 million + $800,000)
Debt-to-Capital Ratio = $1.7 million / $2.5 million
Debt-to-Capital Ratio = 0.68
Therefore, the company's debt-to-capital ratio is 0.68. This means that the company has 68% of its capital in the form of debt and 32% in the form of equity.
The debt-to-capital ratio is an important financial metric that indicates the proportion of a company's capital that is financed through debt. A debt-to-capital ratio of 0.68 means that 68% of the company's total capital is funded by debt, while the remaining 32% is funded by equity.
Having a high debt-to-capital ratio may indicate that a company is heavily reliant on debt to finance its operations, which can increase financial risk. On the other hand, a low debt-to-capital ratio may suggest that a company is more conservative in its financial management.
Overall, understanding and monitoring the debt-to-capital ratio is crucial for investors, creditors, and analysts to assess a company's financial health and risk profile.