Hong Life CalculatorsUnderstanding the debt-to-capital ratio calculator — concept and principle
This calculator measures what share of a company's long-term financing, its capital, comes from debt rather than equity. It shows the debt-to-capital and equity-to-capital ratios, the debt-to-equity ratio, and a version using the market value of equity. Analysts, lenders and finance students use it to compare capital structures across companies.
How it is calculated
- Total debt = short-term debt (including the current portion of long-term debt) + long-term debt
- Total capital = total debt + total shareholders' equity (book value)
- Debt-to-capital (%) = total debt ÷ total capital × 100
- Equity-to-capital (%) = equity ÷ total capital × 100
- Debt-to-equity (%) = total debt ÷ equity × 100
- Market version = total debt ÷ (total debt + market value of equity) × 100
Set the market value to 0 to skip the market version.
The principle
Capital is the money investors have put into the firm that expects a return: lenders through interest-bearing debt and shareholders through equity. Operating liabilities such as payables are left out, which is the main difference from total-liabilities ratios. Debt-to-capital and equity-to-capital always add up to 100%. Using the market value of equity gives the weights that are used in the weighted average cost of capital. For most profitable companies, market equity is above book equity, so the market ratio is lower.
Worked example
Defaults: short-term debt 150,000; long-term debt 650,000; book equity 1,200,000; market value of equity 2,000,000.
- Total debt = $800,000; total capital = 800,000 + 1,200,000 = $2,000,000.
- Debt-to-capital = 800,000 ÷ 2,000,000 × 100 = 40%; equity-to-capital = 60%.
- Debt-to-equity = 800,000 ÷ 1,200,000 × 100 = 66.7%.
- Market version = 800,000 ÷ 2,800,000 × 100 = 28.6%.
| Total shareholders’ equity (book value) | Debt-to-capital ratio |
|---|---|
| 300,000 | 72.7% |
| 600,000 | 57.1% |
| 900,000 | 47.1% |
| 1.2e+06 | 40% |
| 1.5e+06 | 34.8% |
| 1.8e+06 | 30.8% |
| 2.4e+06 | 25% |
How to read the result
A higher ratio means more fixed claims ahead of shareholders and more sensitivity to interest rates and downturns. Stable, asset-heavy businesses can carry higher ratios than volatile ones. Compare within an industry, and check whether the source used book or market equity: the two can differ a lot, as in this example.
Common mistakes
- Including accounts payable in debt.
- Mixing book and market values in one comparison.
- Forgetting the current portion of long-term debt.
- Using negative book equity without noticing that the ratio then exceeds 100%.
Frequently asked questions
What is the difference between debt-to-capital and debt-to-equity?
Debt-to-capital divides debt by debt plus equity; debt-to-equity divides debt by equity only. A 40% debt-to-capital equals 66.7% debt-to-equity.
Which is better, book or market value?
Market value reflects what investors think the equity is worth and is used for cost-of-capital weights; book value is easier to compare with accounting data.
Are lease liabilities debt?
They are usually included; be consistent across companies.
Sources: CFA Institute, "CFA Program Level II Financial Ratio List"