Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > QFINANCE Dictionary > Definition of capitalization ratio

Definition of

capitalization ratio

Finance

proportion of firm’s value in capital the proportion of a company's value represented by debt, stock, assets, and other items.

By comparing debt to total capitalization, these ratios provide a glimpse of a company's long-term stability and ability to withstand losses and business downturns.

A company's capitalization ratio can be expressed in two ways:

= Long-term debt / (Long-term debt + Owners' equity)

and

= Total debt / (Total debt + Preferred + Common equity)

For example, a company whose long-term debt totals $5,000 and whose owners hold equity worth $3,000 would have a capitalization ratio of:

5,000 / (5,000 + 3,000) = 5,000 / 8,000 = 0.625

Both expressions of the ratio are also referred to as component percentages, since they compare a firm's debt with either its total capital (debt plus equity) or its equity capital. They readily indicate how reliant a firm is on debt financing. Capitalization ratios need to be evaluated over time, and compared with other data and standards. Care should be taken when comparing companies in different industries or sectors. The same figures that appear to be low in one industry can be very high in another.

Recommended Further Reading (Term count)
  • Trading in Corporate Bonds: Why and How
    This checklist outlines why and how corporate bonds are traded.
  • Capitalization Ratios
    By comparing debt to total capitalization, these ratios reflect the extent to which a corporation is trading on its equity, and the degree to which it finances operations with debt.While not the focus here, capitalization ratio also refers to the percentage of a company’s total capitalization contributed by debt, preferred stock, common stock, and other equity.
  • How Taxation Impacts on Liquidity Management
    by Martin O’Donovan
    Taxation is highly dependent on the specifics of the companies concerned and the tax jurisdictions to which they are subject. Nonetheless, there are sufficient structural similarities between countries so that background generalizations can be made, although the specific rules and tax rates vary over time and will need to be verified with local tax experts.Tax is initially assessed on the basis of each legal entity in isolation, but various...
capitalization ratio - Related Articles
  • Capitalization Ratios

    Calculations

    Capitalization ratios, also widely known as financial leverage ratios, provide a glimpse of a company’s long-term stability and ability to withstand losses and business downturns.

More

Definitions of ’capitalization ratio’ and meaning of ’capitalization ratio’ are from the book publication, QFINANCE – The Ultimate Resource, © 2009 Bloomsbury Information Ltd. Find definitions for ’capitalization ratio’ and other financial terms with our online QFINANCE Financial Dictionary.

Back to top

Related Blog Posts

More related Blog results