# Debt to Capital Ratio

There are several formulas and equations that can be used to measure the financial leverage and performance of a particular company or corporation. The ratio of debt to capital, also referred to as D/C, is used to define the liabilities and capital of a particular company. Here is more on this...

Scholasticus K

This term implies the amount of money that a business owes to its creditors. There are different types of debts that a business can have, such as loans, credit extensions from suppliers, installment payments for fixed assets, mortgage loans, credit cards, etc. In short, it constitutes all long-term and short-term obligations of the company.*Debt*:It is any kind of money invested in order to run the business. The sources with which the capital for every business organization is raised can be different. The D/C ratio is drastically affected as a result. The capital usually consists of the total amount invested, fixed assets (which are not secured as collaterals), other investments by investors, common stock, and net debt as well.*Capital*:

**Debt to Capital Ratio:**Total debts that are to be paid or are payable รท Total capital Invested + DebtThis formula gives you a two-sided ratio, such as 2:3, which might not prove to be exactly resourceful, in some cases. In such cases, you may also convert the ratio into a percentage. For this purpose, multiply the fraction by 100. According to the ratio 2:3, the total liabilities payable would become 66.66% of the total capital.

Variants

There are different variants of this ratio. The above variant, where the ratio is expressed in a percentage, is one such prominent example. While using this variant of the formula, it is also possible that the output figure tallies up to some weird figure such as 200%. Such figures that exceed 100, indicate that the total debt or liabilities exceed the amount of capital. As mentioned above, the nature of the business organization affects the formula as well as output of the calculation.

Analysis

There is no set of concrete recommendations for this ratio. Thus, the best way to analyze this ratio is to have a look at the constituents of the ratio. There are many companies who consider insurance payments as debt in calculation of this ratio. Some businesses also include prepaid expenditures as capital in the ratio. In general, as a thumb rule, the best financial management and financial planning is observed when the debt is lesser than the capital. In cases of joint stock companies, an equal ratio is much better, as it depicts a very good use of loan and credit facilities.