Long-Term Debt To Capitalization Ratio

See: Capitalization Rate.

It’s just a metric. It kinda speaks to the financial solvency of the company, in that there will be an easily deducible interest rate from that debt. The capitalization of the company usually refers to the balance sheet line Shareholders Equity, or something like that.

It can also refer to the market capitalization of the company. Like…say a company has $100 million in debt and 50 million shares outstanding, and the company’s shares trade today for $40 each. The company then has a $2 billion market capitalization at this moment, and the notion of paying off $100 million is pretty easy, right? That total debt is only 1/20th of the total market cap of the company. If they had to sell 5% of their equity to raise cash and be completely debt-free, it likely wouldn’t be all that hard.

And yes, you can imagine the opposite scenarios. They get ugly. So you generally want your long-term debt to cap ratios to be…small. Like your level of solvency worry before you go to bed.