Debt To Capital Ratio

The Debt to Capital Ratio measures how much debt a company is using to finance its operations when compared to its total capital.

The Formula looks like this.

Debt / (shareholder equity + debt)

So if a company has $30 million in debt and $70 million in equity, its total capital is $100 million and its debt to capital ratio is 30%.

This ratio should be watched carefully, the higher the ratio the more the company is relying on borrowed money to pay for things. Which in turn means it is more likely that the company will get itself in trouble by borrowing too much money.

All industry groups are different so this ratio should be compared with others in the same industry group in order to decide if it is good or bad.

It is also a good idea to consider how long the company has been around. If the company is just starting up then they will not have a lot of equity which they can use to pay for things. Instead they will have to borrow more money. So, when looking at new companies you will probably see a higher ratio.

Other Ratios

The best way to tell how strong a company is would be to compare different fundamental indicators together. Here are a few to look at.

Enterprise Value - This is the true market cap value after everything else is looked at

Accounts Receivable Ratio - This looks at how good of a job a company does when it comes to collecting its credits from sales

Gross Profit Margin - This simple ratio measures a company’s profits after cost of goods sold