what does the total debt to capitalization ratio tell you 
every business uses assets to generate sales and profits and capitalization refers to the amount of money raised to purchase assets a business can raise money by issuing debt to creditors or by selling stock to shareholders you can see the amount of capital raised as reported in the long term debt and stockholders equity accounts on a company s balance sheet examples of the total debt to capitalization ratio in useassume for example that company abc has short term debt of 10 million long term debt of 30 million and shareholders equity of 60 million the company s debt to capitalization ratio is calculated as follows total debt to capitalization ratio 1 0 mill 3 0 mill 1 0 mill 3 0 mill 6 0 mill 0 4 4 0 frac 10 text mill 30 text mill 10 text mill 30 text mill 60 text mill 0 4 40 10 mill 30 mill 60 mill 10 mill 30 mill 0 4 40 this ratio indicates that 40 of the company s capital structure consists of debt consider the capital structure of another company xyz which has short term debt of 5 million long term debt of 20 million and shareholders equity of 15 million the firm s debt to capitalization ratio would be computed as follows total debt to capitalization 5 mill 2 0 mill 5 mill 2 0 mill 1 5 mill 0 6 2 5 6 2 5 frac 5 text mill 20 text mill 5 text mill 20 text mill 15 text mill 0 625 62 5 5 mill 20 mill 15 mill 5 mill 20 mill 0 625 62 5 although xyz has a lower dollar amount of total debt compared to abc 25 million versus 40 million debt comprises a significantly larger part of its capital structure in the event of an economic downturn xyz may have a difficult time making the interest payments on its debt compared to firm abc the acceptable level of total debt for a company depends on the industry in which it operates while companies in capital intensive sectors such as utilities pipelines and telecommunications are typically highly leveraged their cash flows have a greater degree of predictability than companies in other sectors that generate less consistent earnings 