# Debt-to-Capital Ratio

Debt-to-capital ratio is a solvency ratio that measures the proportion of interest-bearing debt to the sum of interest-bearing debt and shareholders' equity.

Interest-bearing debt includes bonds payable, bank loans, notes payable, etc. Non-interest bearing debt includes trade payable, accrued expenses, etc.

The debt-to-capital ratio is a refinement of the debt-to-assets ratio. It measures how much of the capital employed (i.e. the resources on which the company pays a cost) is debt. Higher debt included in the capital employed means higher risk of insolvency.

## Formula

Debt-to-Capital Ratio = | Interest-bearing Debt |

Interest-bearing Debt + Shareholders' Equity |

## Example

Calculate debt-to-capital and debt-to-assets ratios for Intel Corporation (NYSE: INTC). Relevant information for the company for financial year 2012 is as follows:

USD in million | |
---|---|

Short-term debt | 312 |

Accounts payable | 3,023 |

Accrued expenses | 2,972 |

Accrued advertising | 1,015 |

Deferred income | 1,932 |

Other accrued liabilities | 3,644 |

Long-term debt | 13,136 |

Long-term deferred tax liabilities | 3,412 |

Other long-term liabilities | 3,702 |

Total liabilities | 33,148 |

Total shareholders' equity | 51,203 |

Total assets | 84,351 |

__Solution__

Of all the liabilities listed on the INTC balance sheet, short-term debt and long-term debt are interest-based. The rest are non-interest. Hence, they are excluded from calculation of debt-to-capital ratio.

USD in million | |
---|---|

Short-term debt | 312 |

Long-term debt | 13,136 |

Total interest-bearing debt | 13,448 |

Total shareholders' equity | 51,203 |

Capital employed (interest-based debt + equity) | 64,651 |

Total liabilities | 33,148 |

Total assets | 84,351 |

Debt-to-capital Ratio = | $13,448 million | = 0.208 |

$13,448 million + $51,203 million |

Debt-to-assets Ratio = | $13,448 million | = 0.393 |

$84,351 million |

by Obaidullah Jan, ACA, CFA and last modified on