What is Capital Debt Ratio?
The capital debt ratio, also known as the debt-to-equity ratio, is a financial metric used to evaluate a company's capital structure. It is calculated by dividing a company's total debt by its total equity. This ratio helps investors and analysts understand how much of a company's financing comes from debt and how much comes from equity. A high capital debt ratio indicates that a company has a greater amount of debt relative to equity, while a low ratio indicates the opposite. The ideal ratio varies depending on the industry and the company's financial goals, but generally a lower ratio is considered more favorable.
What Is A Good Debt Capital Ratio?
The ideal debt-to-equity ratio varies depending on the industry and the company's financial goals. Generally, a lower ratio is considered more favorable, as it indicates that a company has a greater amount of equity relative to debt and is less leveraged.
For example, a ratio of less than 0.5 is considered to be conservative and a ratio of 1 is considered to be more aggressive. However, it is important to note that the ideal ratio also depends on the company's ability to generate cash flow to pay off its debt.
For example, a stable, mature company in a low-growth industry may be able to handle a higher debt-to-equity ratio than a rapidly growing start-up in a high-growth industry. It's also important to compare a company's debt-to-equity ratio to that of its peers in the same industry as well.
In general, a good debt-to-equity ratio should be considered in the context of a company's overall financial health and ability to generate cash flow to pay off its debt.
What Is Debt-to-Capital Ratio Formula?
The debt-to-capital ratio formula is:
Debt-to-Capital Ratio = (Total Debt) / (Total Debt + Total Equity)
Where:
- Total Debt = Long-term debt + Short-term debt
- Total Equity = Shareholder's equity + Retained earnings
This ratio is also known as the capital structure ratio, which measures the proportion of a company's financing that comes from debt and the proportion that comes from equity.
It is important to note that debt-to-capital ratio is different from debt-to-equity ratio, as debt-to-capital ratio includes both short-term and long-term debt and takes into account the whole capital structure of the company, while debt-to-equity ratio only includes long-term debt and shareholder's equity.
What If Debt to Capital Ratio Is Less Than 1? (What does a low debt to capital ratio mean?)
If a company's debt-to-capital ratio is less than 1, it means that the company has more equity than debt in its capital structure. This is generally considered a positive indication of the company's financial health, as it suggests that the company has a lower level of leverage and is less reliant on debt financing.
A low debt-to-capital ratio can indicate that a company has a strong financial position, with a healthy balance between debt and equity. It also implies that the company has a good capacity to generate cash flow to pay off its debt and can also be an indication of a strong creditworthiness.
However, it's important to note that a low debt-to-capital ratio doesn't necessarily mean that a company is profitable or that it will be a good investment. It's just an indicator of the company's capital structure and the company's ability to service its debt. Other factors such as the company's profitability, earnings growth, and management quality should be considered to evaluate a company's overall financial health.
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FAQs
The capital debt ratio, also known as the debt-to-equity ratio, is a financial metric used to evaluate a company's capital structure. It is calculated by dividing a company's total debt by its total equity.
What is the meaning of debt capital ratio? ›
The debt-to-capital ratio (D/C ratio) measures the financial leverage of a company by comparing its total liabilities to total capital. In other words, the debt-to-capital ratio formula measures the proportion of debt that a business uses to fund its ongoing operations as compared with capital.
What is a good value for debt-to-capital ratio? ›
According to HubSpot, a good debt-to-equity ratio sits somewhere between 1 and 1.5, indicating that a company has a pretty even mix of debt and equity. A debt to total capital ratio above 0.6 usually means that a business has significantly more debt than equity.
What is Capital One's debt ratio? ›
Capital One Financial Debt to Equity Ratio: 0.8615 for March 31, 2024.
How do you explain debt ratio? ›
A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.
What does capital ratio tell us? ›
CAR, or the capital adequacy ratio, is a comparison of the available capital that a bank has on hand to its risk-weighted assets. The ratio provides a quick idea of whether a bank has enough funds to cover losses and remain solvent under difficult financial circ*mstances.
What is a bad debt to capital ratio? ›
From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.
What is too high for debt ratio? ›
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
What is a healthy debt ratio? ›
35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.
What is the ideal capital ratio? ›
Determining a Good Working Capital Ratio
Generally, a working capital ratio of less than one is taken as indicative of potential future liquidity problems, while a ratio of 1.5 to two is interpreted as indicating a company is on the solid financial ground in terms of liquidity.
Debt-to-income ratio requirements by loan type
| Loan Type | Front-End | Back-End |
|---|
| Conventional loan | 28 percent | 36 percent |
| FHA loan | 31 percent | 43 percent |
| VA loan | No set limits | 41 percent recommended |
| USDA loan | 29 percent | 41 percent |
Jun 7, 2024
In general, a ratio around 0.3 to 0.6 is where many investors will feel comfortable, though a company's specific situation may yield different results.
What is the main capital ratio? ›
Common capital ratios
- CET1 Capital Ratio = Common Equity Tier 1 / Risk-weighted assets ≥ 4.5%
- Tier 1 Capital Ratio = Tier 1 Capital / Risk-weighted assets ≥ 6%
- Total Capital Ratio = Total Capital (Tier 1 + Tier 2) / Risk-weighted assets ≥ 8%
- Leverage Ratio = Tier 1 Capital / Average total consolidated assets value ≥ 3%
The debt-to-equity ratio measures how much debt a company has relative to its shareholders' equity. It indicates how much leverage a company is using to finance its assets and operations. A high debt-to-equity ratio means that a company has more debt than equity, which implies a higher risk of default and insolvency.
What is the problem with debt ratio? ›
A high debt ratio, or a ratio greater than 1, indicates that your company has more debt than assets and is at financial risk. This could mean your company won't be able to pay back its loans, debts and other financial obligations.
How much debt is bad? ›
If it's between 43% to 50%, take action to reduce your debt load; consulting a nonprofit credit counseling agency may be helpful. If it's 50% or more, your debt load is high risk; consider getting advice from a bankruptcy attorney.
What is a good debt to ratio? ›
A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%. This is seen as a wise target because it's the maximum debt-to-income ratio at which you're eligible for a Qualified Mortgage —a type of home loan designed to be stable and borrower-friendly.
What is a good debt to working capital ratio? ›
Typically, working capital to debt ratio between 1.0 - 2.0 is considered good. In the United States, the average working capital to debt ratio for all public companies is 0.92. However, this does not mean that a higher or lower ratio would be negative, only that it would be out of line with similar company averages.
Is a debt ratio of 1 good or bad? ›
If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.
What is debt equity ratio in simple words? ›
The debt-to-equity ratio (D/E ratio) depicts how much debt a company has compared to its assets. It is calculated by dividing a company's total debt by total shareholder equity. Note a higher debt-to-equity ratio states the company may have a more difficult time covering its liabilities.
