what does debt to capital ratio tell you 
the debt to capital ratio gives analysts and investors a better idea of a company s financial structure and whether or not the company is a suitable investment all else being equal the higher the debt to capital ratio the riskier the company this is because a higher ratio the more the company is funded by debt than equity which means a higher liability to repay the debt and a greater risk of forfeiture on the loan if the debt cannot be paid timely however while a specific amount of debt may be crippling for one company the same amount could barely affect another thus using total capital gives a more accurate picture of the company s health because it frames debt as a percentage of capital rather than as a dollar amount example of how to use debt to capital ratioas an example assume a firm has 100 million in liabilities comprised of the following of these only notes payable bonds payable and long term liabilities are interest bearing securities the sum of which total 5 million 20 million 55 million 80 million as for equity the company has 20 million worth of preferred stock and 3 million of minority interest listed on the books the company has 10 million shares of common stock outstanding which is currently trading at 20 per share total equity is 20 million 3 million 20 x 10 million shares 223 million using these numbers the calculation for the company s debt to capital ratio is assume this company is being considered as an investment by a portfolio manager if the portfolio manager looks at another company that had a debt to capital ratio of 40 all else equal the referenced company is a safer choice since its financial leverage is approximately half that of the compared company s as a real life example consider caterpillar nyse cat which has 36 6 billion in total debt as of december 2018 1 its shareholders equity for the same quarter was 14 billion 2 thus its debt to capital ratio is 72 or 36 6 billion 36 6 billion 14 billion the difference between debt to capital ratio and debt ratiounlike the debt to capital ratio the debt ratio divides total debt by total assets the debt ratio is a measure of how much of a company s assets are financed with debt the two numbers can be very similar as total assets are equal to total liabilities plus total shareholder equity however for the debt to capital ratio it excludes all other liabilities besides interest bearing debt limitations of using debt to capital ratiothe debt to capital ratio may be affected by the accounting conventions a company uses often values on a company s financial statements are based on historical cost accounting and may not reflect the true current market values thus it is very important to be certain the correct values are used in the calculation so the ratio does not become distorted 