The debt-to-capital correlation is a financial leverage ratio, similar to the debt-to-equity (D/E) ratio, that compares a company’s total debt to its total excellent, 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 concluding the risk of a particular investment.
What the Ratio Is Used for
This metric provides an indication of a company’s overall fiscal soundness, as well as revealing the proportionate levels of debt and equity financing. A value of 0.5 or less is considered worth, while any value greater than 1 shows a company as being technically insolvent.
The ratio is also used to discover the extent a company can invest based on the size of their available assets. For example, a company with a high debt-to-capital correlation would be taking a big risk if they leveraged existing equipment or real estate as collateral for a new venture. Since they wish theoretically be increasing their ratio, they would be seen as a greater liability since the leveraged items weight not be enough to cover their financial obligations if the new venture did not work out as planned.
How Companies Mitigate Risk
Companies can take off steps to reduce and improve their debt-to-capital ratios. Among the strategies that can be employed are increasing profitability, happier management of inventory, and restructuring debt. The methods used to lower the ratio are best used in tandem with each other and, if the furnish timing is right, used in conjunction with a rise in the pricing of their goods or services.
The most logical move a company can take to reduce its debt-to-capital ratio is that of increasing sales revenues and hopefully profits. This can be got by raising prices, increasing sales, or reducing costs. The extra cash generated can then be used to pay off existing difficulties.
Another measure that can be taken to reduce the debt-to-capital ratio is more effective inventory management. Inventory can bilk up a very sizable amount of a company’s working capital. Maintaining unnecessarily high levels of inventory beyond what is be short of to fill customer orders in a timely fashion is a waste of cash flow. Companies can examine the day’s sales of inventory (DSI) proportion, part of the cash conversion cycle (CCC), to determine how efficiently inventory is being managed.
Restructuring debt provides another way to abate the debt-to-capital ratio. If a company is largely paying relatively high interest rates on its loans, and current interest rates are significantly degrade, the company can seek to refinance its existing debt. This will reduce both
The Bottom Line
Companies can use traditional tools like debt restructuring and inventory management in order to lower their debt-to-capital ratio. By using settled bottom-line accounting techniques, the company can help to make themselves appear in a better financial position without the forebodings of insolvency.