Companies can fund themselves through debt (borrowing money) or equity (issuing shares in return for investment). The debt to capital ratio measures a company’s financial leverage – how much it is funded by debt. It divides total liabilities by total capital (total liabilities + shareholder equity). The higher the debt to capital ratio the more debt the company has compared to its equity. Companies can use debt effectively to fund growth if the return on investment is higher than the cost of borrowing. However, companies with a higher ratio than market or sector peers may be weakened if the costs of servicing the debt become burdensome. Note that some industries (e.g. automotive, construction) are more capital intensive than others.
Debt to capital ratio must be equal to or less than 50%.
