The debt to asset ratio, the debt to equity ratio, and the long-term debt to total capitalization ratio all measure the extent of the firm's financing with debt. The long-term debt to total capitalization ratio shows the extent to which long-term debt, like bonds and mortgages, are used for the firm's permanent financing.
The calculation for long-term debt to total capitalization is as follows:
Long-term Debt/Long-term debt + Stockholder's Equity = ___%
Interpretation: As the percentage gets higher, this means that a higher proportion of debt is used for the permanent financing for the firm as opposed to investor funds. You have to have historical data from the firm and/or industry data for comparison, however. As the proportion of debt gets higher, so does risk and the chance of bankruptcy.
- Back: Debt to Equity Ratio
- Forward: Times Interest Earned Ratio
