Long-Term Debt to Total Capital
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What is Long-Term Debt to Total Capital?
Long-Term Debt to Total Capital compares long-term debt to total capital, assessing the reliance on long-term financing for capital structure.
How do you interpret Long-Term Debt to Total Capital?
Long-Term Debt to Total Capital measures the proportion of long-term debt within the total capital, reflecting the company’s reliance on long-term borrowing for its capital needs.
How to Calculate Long-Term Debt to Total Capital?
The ratio is calculated by dividing the company’s long-term debt by its total capital, which includes both debt and equity.
Long-Term Debt to Total Capital = Long-Term Debt / (Long-Term Debt + Total Shareholders’ Equity)
where - Long-Term Debt includes liabilities with maturities greater than one year.
- Total Shareholders’ Equity represents the shareholders’ investment in the company.
Why is Long-Term Debt to Total Capital important?
This ratio is crucial for understanding a company’s capital structure and its financial risk. A company with a high reliance on long-term debt might have higher interest obligations, which could impact its financial stability during downturns.
How does Long-Term Debt to Total Capital benefit investors?
This ratio helps investors gauge the financial leverage and long-term obligations of a company. It can provide insights into how a company finances its growth and operations and whether it is overly dependent on debt, which may pose risks in a rising interest rate environment.
Using Long-Term Debt to Total Capital to Evaluate Stock Performance
A balanced Long-Term Debt to Total Capital ratio, along with strong cash flows and profitability, can indicate that a company is effectively managing its long-term obligations, which may positively affect stock performance. Conversely, a high ratio could signal potential financial strain, impacting stock value.
FAQ about Long-Term Debt to Total Capital
What is a Good Long-Term Debt to Total Capital?
A good ratio depends on the industry. For capital-intensive sectors like utilities, ratios around 50-60% may be common. In less capital-intensive industries, lower ratios (below 30%) are generally considered preferable.
What Is the Difference Between Metric 1 and Metric 2?
Long-Term Debt to Total Capital focuses on the proportion of long-term debt in the total capital structure, while Debt to Equity compares total debt to shareholders’ equity, providing a broader view of a company’s leverage.
Is it bad to have a negative Long-Term Debt to Total Capital?
A high ratio can indicate greater financial risk because the company is more dependent on long-term debt. This could lead to increased interest expenses and reduced financial flexibility, especially during periods of rising interest rates.
What Causes Long-Term Debt to Total Capital to Increase?
The ratio increases when a company raises long-term debt or if its equity decreases due to factors such as share buybacks or accumulated losses.
What are the Limitations of Long-Term Debt to Total Capital?
This ratio doesn’t take into account the company’s ability to generate cash flows or service its debt. A company with a high ratio may still be financially healthy if it has strong cash flows and low default risk.
When should I not use Long-Term Debt to Total Capital?
It may be less relevant for companies with minimal long-term debt, such as those in early stages of development or in industries that primarily rely on equity financing.
How does Long-Term Debt to Total Capital compare across industries?
This ratio varies by industry, with capital-intensive industries typically having higher ratios due to the need for significant infrastructure investment, while technology and service-oriented sectors generally exhibit lower ratios .
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