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What is the debt-to-capital ratio?

Debt-to-capital ratio

This measures a company’s use of debt in comparison with its total external financing, including shareholder equity. Most companies finance their operations through a mixture of debt and equity.

Where have you heard about the debt-to-capital ratio?

It's one of many financial ratios used by investors and portfolio managers to evaluate a company. It provides a benchmark for them to compare information with other businesses to see which is the safer investment.

What you need to know about the debt-to-capital ratio.

Companies generally prefer equity to debt as loans usually have fixed monthly repayments that they're obligated to make.

The debt-to-capital ratio is calculated by dividing total debt by equity + debt. For example, a company lists £20,000 on its balance sheet, along with £35,000 in equity. The formula divides £20,000 by £55,000 (equity + debt) to determine the debt-to-capital ratio. The result is 0.36 or 36%. This shows that the company uses 36% of debt to finance operations through external funding. Lower figures indicate less debt and therefore less risk.

Find out more about the debt-to-capital ratio.

Read our definition of debt-to-equity ratio to find out about a similar valuation tool.

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