Debt to Total Capital Ratio

The relationship between creditors funds and owner’s capital can also be expressed in terms of another leverage ratio. This is the debt to total capital ratio. Here, the outside liabilities are related to the total capitalization of the firm and not merely to the shareholder’s equity. Essentially, this type of capital structure ratio is a variant of the D/E ratio described above. It can he: calculated in different ways.

One approach is to relate the long-term debt to the permanent capital of the firm. Included in the permanent capital are shareholders equity as well as long- term debt. Thus,

1

Another approach to calculating the debt to capital ratio is to relate the total debt to the total assets of the firm. The total debt of the firm comprises long-term debt plus current liabilities. The total assets consist of permanent capital plus current liabilities. Thus,

1

Still another variant of the D/E ratio is to relate the owner’s/proprietor’s funds with total assets. This is called the proprietary ratio, The ratio indicates the proportion of total assets financed by owners. Symbolically, it is equal to:

1

Finally, it may also be of some interest to know the relationship between equity funds (also referred to as net worth) and fixed-income bearing funds (preference shares, debentures and other borrowed funds). This ratio; called the capital gearing ratio, is useful when the objective is to show the effect of the use of fixed-interest/dividend source of funds on the earnings available to the equity shareholders.

reCAPTCHA is required.

Share This