This long term debt to capitalization ratio calculator measures the financial leverage of a company by dividing its long term debts by its total capital. There is more info on how to calculate this indicator below the tool.
How does this long term debt to capitalization ratio calculator work?
The formula applied by this long term debt to capitalization ratio calculator is detailed below:
LTDCR = Long term debts / (Long term debts + Preferred stock + Common stock)
This indicator is often used to:
- Assess the control level utilized by a company;
- Compare two or more competitors on their financing strategy, implicitly their risk exposure;
- Evaluate how much a company relies on long term debts and how much on stocks;
- Check whether a corporation’s strategy is aligned with the economic context;
- Evaluate the total risk of investing in a specific business.
The interpretation of the long term debt to capitalization ratio level
If the ratio is higher [tends to equal 1 (100%)] it means that the company in question uses debts to finance its activity in a higher proportion than selling stocks, which typically is considered a riskier strategy due to the unpredictable changes of the interest rates. And so, it is considered that the higher the ratio is, the weaker the company is from a financial point of view.
Example of LTDCR ratio calculation
Let’s assume that an online magazine has the following financial status:
Long term debts = $100,000
Preferred stocks = $50,000
Common stocks = $60,000
In this scenario the LTDCR ratio is $100,000 / ($100,000 + $50,000 + $60,000) which equals to 0.48 (or 47.62%).30 Apr, 2015 | 0 comments