Debt to Capital Ratio

From Financial Literacy Wiki

The Debt to Capital Ratio (also known as D/C ratio) shows the proportion of a company's debt to its total capital, which consists of the sum of its debt and equity combined. For example, if a company uses $25 debt and $75 in equity, the total capital of the company is $100, and the debt-to-capital ratio would be 25%. This is similar to Debt to Total Asset Ratio.

Companies can alter this ratio by issuing more shares (to increase the equity), buying back shares (to reduce the equity), issuing additional debt(increase debt), or retiring debt(decrease debt). The definition of "debt" varies, with most practitioners considering any interest-bearing liability to qualify. Others include all liabilities in the classification, including trade payables and unearned revenues, while still others look at it as more of a capital structure metric, and only include Long Term debt and its associated currently-due portion. Most important in any ratio analysis however when comparing companies is consistency. All of the data to calculate the ratio can be found on the balance sheet.

The D/C ratio is regularly used to measure a company's capital structure and its financial solvency, and this metric is considered an expression of a company's so-called "leverage", with a higher proportion of debt constituting a higher degree of leverage. But investors should note that the higher the proportion of debt also means that the company is taking on higher risk, whether it can pay back the off the interest and debt through its realised cashflow.