The debt-to-capital relationship is a financial leverage ratio, similar to the debt-to-equity (D/E) ratio, that compares a company’s total debt to its total outstanding, which is composed of debt financing and equity. The ratio is something used as a baseline for a company’s financial standing and is something investors use when discovering the risk of a particular investment.
What the Ratio Is Used For
This metric provides an indication of a company’s overall monetary soundness, as well as revealing the proportionate levels of debt and equity financing. A value of 0.5 or less is considered friendly, while any value greater than 1 shows a company as being technically insolvent.
The ratio is also used to resolve the extent a company can invest based on the size of their available assets. For example, a company with a high debt-to-capital relationship would be taking a big risk if they leveraged existing equipment or real estate as collateral for a new venture. Since they discretion theoretically be increasing their ratio, they would be seen as a greater liability since the leveraged items mightiness not be enough to cover their financial obligations if the new venture did not work out as planned.
Key Takeaways
- The debt-to-capital ratio is a financial leverage relationship, similar to the debt-to-equity (D/E) ratio.
- This metric provides an indication of a company’s overall financial soundness, as well as revealing the proportionate levels of indebted and equity financing.
- Among the strategies that can be employed are increasing profitability, better management of inventory, and restructuring responsibility.
How Companies Mitigate Risk
Companies can take steps to reduce and improve their debt-to-capital ratios. Among the scenarios that can be employed are increasing profitability, better management of inventor
The Bottom Line
Companies can use certain tools with debt restructuring and inventory management in order to lower their debt-to-capital ratio. By using certain bottom-line accounting styles, the company can help to make themselves appear in a better financial position without the fear of insolvency.