what is the long term debt to capitalization ratio 
the long term debt to capitalization ratio a variation of the traditional debt to equity d e ratio shows the financial leverage of a firm it is calculated by dividing long term debt by total available capital long term debt preferred stock and common stock investors compare the financial leverage of firms to analyze the associated investment risk high ratios indicate riskier investments as debt is the primary source of financing and introduces a greater risk of insolvency understanding long term debt to capitalization ratioto achieve a balanced capital structure firms must analyze whether using debt equity stock or both is feasible and suitable for their business financial leverage is a metric that shows how much a company uses debt to finance its operations a company with a high level of leverage needs profits and revenue that are high enough to compensate for the additional debt they show on their balance sheet long term debt can be beneficial if a company anticipates strong growth and ample profits permitting on time debt repayments lenders collect only their due interest and do not participate in profit sharing among equity holders making debt financing sometimes a preferred funding source on the other hand long term debt can impose great financial strain on struggling companies and possibly lead to insolvency long term debt and cost of capitalcontrary to intuitive understanding using long term debt can help lower a company s total cost of capital lenders establish terms that are not predicated on the borrower s financial performance therefore they are only entitled to what is due according to the agreement e g principal and interest when a company finances with equity it must share profits proportionately with equity holders commonly referred to as shareholders financing with equity appears attractive and may be the best solution for many companies however it is quite an expensive endeavor financing risk