Big companies carry big debts, at least in total terms.
GlobalMicroTechBioPharma Corp. owes $10 billion to people in various forms, through things like borrowing from banks and bond issuances. That amount sounds like a lot, but the company also has $100 billion in annual revenue. So, keeping up with the debt service payments isn't a big deal.
Like how some people might get evicted from a $250,000 house because they can't afford the mortgage payments. Meanwhile, Elon Musk can easily keep up with the payments for many multi-million dollar mansions. Something affordable for one person might be out of the question for other people. Different people can handle different debt levels.
But how does a company know whether its debt levels are too high? Capitalization ratios. These figures show the amount of debt a company has compared to the amount of other capital it has (especially equity).
A few types of capitalization ratios exist.
You've got the Debt-to-Equity Ratio. It shows the amount of debt that a company has, versus the amount of equity it has issued.
You've got Long-Term Debt-to-Capitalization ratios. This figure indicates the amount of debt a company has compared to its total capitalization. The total capitalization includes both the debt and the shareholders' equity.
Then you've got the Total Debt-to-Capitalization ratio. This number compares the company's total debt to its total capitalization.
That's the holy trinity. Pray to them often.
Related or Semi-related Video
Finance: What is recapitalization?34 Views
finance a la shmoop what is recapitalisation all right people think
nee capitalization you know in Jersey like when you owe the mob money at least [thug breaks knee with bat]
that's what it feels like if you're a common equity stockholder of a company [businessman with common stock]
that has been recapped well usually recapitalisation is a very kindly loving
politically correct term for a pal you're bankrupt you borrowed money you
promised to pay back and you didn't so now you're out and the lenders now own
your company buh and buy so typical recap comes from a company that was very
early stage and had preferred stock upon preferred stock from venture capital
investors sitting above their common in the priority stack and eventually the
company burned through eighty seven million dollars and it has just a [dollars on fire]
million bucks left in the bank and it built something out of that eighty seven [company logo graveyard]
million not quite worth putting here yeah but it might be worthy of a new
investment of say yo thirty million or more dollars but the marketplace values [money going into company briefcase]
this zombie company yes that's what they're called at a [zombie briefcase walking at night]
value well less than the eighty seven million that has been raised previously
so everything is marked down usually with a common in total being worth [store during closing sale]
something like one percent of the new company and that's oh so sad for the
founders because it was a hundred percent of the company the day they
started so they were recapped and lest more mature companies feel left out well
recapitalisation happens in later stage companies as well and the radio industry
famously took on too much debt in the late 1990s and then people stop [radio knob getting changed]
listening to Drivetime radio as cell phones and satellite radio intruded I
bring radio borrowed five billion dollars at seven percent to oh three
hundred fifty million a year and then when cash earnings fell well below that
number while the company had to recap its five billion of debt such that those
debt holders now own essentially all of I brain radio and hope to someday milk
enough cash out of it to get their principal back knowing and it'll likely [goat getting milked]
be a very low interest rate or a low return on their and
if a positive one at all hopefully that all made sense you the first time though
because well we don't have time here in this video for a recap
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