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