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Capitalization ratio definition

Description

Capitalization ratio shows the debt component of a company's capital structure (capitalization). Capitalization can be explained as the sum of long term debt and shareholders' equity. Data to calculate this ratio is collected from balance sheet.

This ratio is important to company’s owners as well as long term creditors, because it shows the proportions of their money that are being used within the company.

Norms and limitations

There are no general norms for this ratio.

It is recommended to compare this ratio with ratios of companies working within the same industry.

Formula

Long - term debts mean loans and financial obligations lasting over the period of twelve months.

Equity (Shareholders’ equity) shows the equity stake currently held on company’s balance sheet. In other words, it means total assets minus total liabilities.