Listed for Year One and Two, this ratio is calculated by dividing long-term debt (excluding other liabilities) by total capitalization (the sum of common equity plus preferred equity plus long-term debt). This figure is not provided for financial companies.
Benefit
Companies raise long-term capital from three basic sources: long-term debt, shareholders’ equity, and preferred shares. Debt to total capitalization shows how much long-term debt the company uses as a percent of its total long-term capital. The higher the debt to total capitalization, the more a company has leveraged its capital structure with debt—which typically means higher risk.
Origin
The company’s long-term debt is found under the liabilities area of the company’s balance sheet. Total capitalization is computed from information in the liability and equity section of the company’s balance sheet.
For the Pros
If you’re looking to screen for financially solid companies, one way is to put a cap on debt to total capitalization. By only looking for companies with less than 50% of their total capitalization made up of debt, for example, you limit your search to just those companies with conservative capital structures.