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How to Calculate Long-Term to Total Capitalization

Original post by Amanda Webster of Demand Media

Too much long-term debt on a company's balance sheet can scare away potential investors.

"Total capitalization" is “the total long-term debt and all types of equity of a company that constitutes its capital structure,” according to the Duke University online Hypertextual Finance Glossary. Total capitalization can also be described as the “full debt load” of the company. Knowing the ratio of long-term debt to total capitalization helps company decision-makers and potential investors identify the percentage of total capitalization that comes from long-term debt.

Contents

Step 1

Analyze your long-term debt. According to the Spireframe Software website, long-term debt to total capitalization is calculated by this formula: Long-term debt divided by (long-term debt + stockholders' equity). To complete this calculation, first determine the figure to use for long-term debt. Long-term debts, also referred to as long-term liabilities, are any balances owed for 12 or more months, according to the online Business Dictionary. Long-term debts should be listed on your company’s balance sheets. For example, if the company owes $50,000 on its mortgage and $20,000 on equipment, the total long-term debt is $70,000.

Step 2

Calculate total stockholders' equity. According to the Accounting Coach website, this is done using the following equation: Assets minus Liabilities = Stockholders' Equity. So to determine the correct figure to use in the formula for long-term debt to total capitalization, you subtract the total liabilities listed on the balance sheet from the total assets. Assets are all of a company’s resources that have monetary value that can be expressed in dollars. Liabilities are all of the organization’s financial obligations. For example, if the company owns $80,000 in assets and has $70,000 in liabilities, $10,000 remains for stockholders' equity.

Step 3

Add long-term debt to stockholders' equity. Add the long-term debt amount calculated in Step 1 to the stockholders' equity figure obtained in Step 2. Record this number for use in Step 4. Using the previous example, you would add the $70,000 of long-term debt from Step 1 to the $10,000 in stockholders' equity from Step 2, for a total of $80,000.

Step 4

Divide the long-term debt amount from Step 1 by the long-term debt plus stockholders' equity obtained in Step 3. The final figure is your long-term debt to total capitalization ratio. This is the percentage of the company’s total capitalization that consists of long-term debts. Using the previous example, you would divide $70,000 by $80,000 to obtain a long-term debt to total capitalization ratio of .875.

Step 5

Convert the ratio obtained in Step 4 to a percentage by moving the decimal point to the right two places, so .875 is expressed as 87.5 percent. This tells you that 87.5 percent of the company’s total capitalization is long-term debts.


                   

References

About the Author

Amanda Webster has a Bachelor of Science in business administration and a Master of Science in management. She is currently pursuing a Master of Arts in English with a concentration in writing and has been working as a freelance writer since 2008. Webster is also editor-in-chief of the Mount Mary College newspaper, "Arches."

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