What is the long-term debt to total capitalization ratio? How is it calculated?

19 March :: The debt to asset ratio, the debt to equity ratio, and the long-term debt to total capitalization ratio all measure the extent of the firm’s financing with debt. The long-term debt to total capitalization ratio shows the extent to which long-term debt, like bonds and mortgages, are used for the firm’s permanent financing. On the flip side, it shows how much of the firm is finance by investor funds or equity.

The calculation for long-term debt to total capitalization is as follows:

Long-term Debt/Long-term debt + Stockholder’s Equity = ___%

Interpretation: As the percentage gets higher, this means that a higher proportion of debt is used for the permanent financing for the firm as opposed to investor funds (equity financing). You have to have historical data from the firm and/or industry data for comparison, however. As the proportion of debt gets higher, so does risk and the chance of bankruptcy.