{"id":201595,"date":"2021-01-26T11:34:00","date_gmt":"2021-01-26T19:34:00","guid":{"rendered":"https:\/\/www.nationalfunding.com\/blog\/?p=201595"},"modified":"2023-11-01T10:40:57","modified_gmt":"2023-11-01T17:40:57","slug":"how-knowing-your-debt-to-capital-ratio-can-help-with-financing-decisions","status":"publish","type":"post","link":"https:\/\/www.nationalfunding.com\/blog\/how-knowing-your-debt-to-capital-ratio-can-help-with-financing-decisions\/","title":{"rendered":"How Your Debt-to-Capital Ratio Helps in Financing Decisions"},"content":{"rendered":"

How much debt is too much debt when you own a business?<\/p>\n

Calculating your debt-to-capital ratio is a quick way to see whether your business is in a stable position. Knowing how to calculate and interpret your ratio will help you keep your long-term strategy on track \u2014 and put you in a better position to raise money.<\/p>\n

What Is the Debt-to-Capital Ratio?<\/h2>\n

This ratio measures how a business raises money through debt versus through investors (also called shareholder equity). Businesses that raise a higher proportion of their capital through debt could be at a higher financial risk, as they’ll need to pay off that debt and any interest that accrues.<\/p>\n

If you raise money by acquiring investors, you’re not tied to recurring repayments like you are with a loan. However, your investors are entitled to a share of your profits, so the downside is that there could be less profit left over for you.<\/p>\n

Because there are benefits and drawbacks to each strategy, a business could use both to raise money. The ratio is also known as the debt to total capital ratio because it measures the share of debt versus all capital raised, whether from debt or from investors.<\/p>\n

Calculating the Debt-to-Capital Ratio<\/h2>\n

You can calculate this ratio using the following formula:<\/p>\n

Debt-to-Capital Ratio = Total Debt \u00f7 (Total Debt + Total Shareholder Equity)<\/strong><\/p>\n

Your total debt is every outstanding interest-bearing debt \u2014 short- and long-term \u2014 that your business holds. This includes credit card debt, outstanding lines of credit, cash flow loans, equipment loans, vehicle loans, mortgages \u2014 basically any debt where you owe interest. Your total shareholder equity is the total value of your business that’s owned by your business partners and investors. You can find these figures on the balance sheets of your accounting statements.<\/p>\n

If you don’t know how much equity your shareholders have, you can find it by subtracting your liabilities (i.e., everything your business owes, including debts) from your total assets (i.e., everything your business owns). Whatever’s left represents your shareholders’ equity.<\/p>\n

Let’s look at an example. Let’s say that John owns a construction firm. His business has the following outstanding debts:<\/p>\n