yeshua68 Posts: 8, Reputation: 1 New Member #1 Jul 27, 2009, 01:36 PM
Debt to Capitalization
What is the difference between Debt to Capitalization and Total Debt to Equity? I'm looking at my company which has on its financial report that its debt to capitalization is 36.6% FYE 2008 and 37% FYE 2007. I've been looking up info on debt to capitalization but I'm not sure what this is trying to tell me.
 morgaine300 Posts: 6,561, Reputation: 276 Uber Member #2 Jul 27, 2009, 04:21 PM

It's actually comparing the same set of numbers, but in a different way. Personally I think debt to equity is a little weird and my mind, while understanding the math, doesn't really make sense of it.

The accounting definition of capital is the same as equity. But the finance definition (which is what this is) of capital is equity and long-term debt. That is, all the financing, both debt & equity. So by saying "capitalization" it's including the long-term debt.

So the difference between the two is that one divides by equity only and the other divides by both the long-term debt and the equity.

Debt to capitalization: Long-term debt/long-term debt + equity
So it's a percent of all of the financing including itself.

Debt to equity: Long-term debt/equity
So it's a percent of just the equity, which is the one I find a bit odd.

So if long-term debt is 10,000 and equity is 15,000:
Debt to capitalization: 10,000/25,000 = 40%
Debt to equity: 10,000/15,000 = 67%
It's just two different ways to look at the same thing.

I look at it from the accounting equation point of view (perhaps cause I'm an accounting person, not a finance person):
25,000 = 10,000 + 15,000

The 40% is what percent debt is of the entire right side.
The 67% is what percent debt is of only the equity.
(Note that I ignored short-term stuff just to simplify.)

Now whether those numbers are good or bad depends on other factors, like what industry it is, and for that matter, whose opinion it is. I personally like to see less debt.

Debt Ratios: Introduction

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