**Debt to Capital Ratio**is a

**type of Solvency Ratio that determines the contribution of Debt in a company’s Total Capital.**It is a measure of the total debt of a company relative to its total capital.

__Creditor's contribution is termed as Debt and Debt along with total Equity is termed as Total Capital.__$$Debt\quad to\quad Capital\quad Ratio=\frac { Total\quad Debt }{ Total\quad Capital } $$

**Total Debt = Long Term Debt + Current or Short-Term Debt;**hence, total debt includes all debts/liability payable within a year and payable in the long-term.

**Where,**

- And
**Total Capital = Total Equity + Total Debt;**total capital implies shareholders as well as creditors contribution.

## Significance and Interpretation

- Debt to Capital Ratio =
- For, Debt to Capital Ratio = 1, Total Equity must be Zero, which is not possible.
**Hence, the Maximum Value of Debt Capital Ratio = 1**

**Debt Capital Ratio = 0.5:**This implies that the Debt Contribute to 50% of the Total Capital or Total Debt is equal to Total Equity i.e. there is just enough Equity to cover all Debt.**Debt Capital Ratio <0.5:**This implies that Debt contributes to less than 50% of the total capital and there is enough equity to cover all debts.**Debt Capital Ratio > 0.5:**This implies that Debt contributes to more than 50% of the total capital, the company faces lots of issues in times when the interest rates rise.- The
**ideal Debt Capital Ratio < 0.5,**which indicates that the company has**less than half of the capital as debt**(both current as well as non-current). However, it must be noted that this limit may shift depending upon the regulatory reforms and/or type of business. __A low Debt to Capital Ratio is beneficial for lenders to the company, wherein a high Debt to Capital Ratio is beneficial to the company for trading in Equities.__

### Examples

####
**Example 1: **

**M/S ABC Ltd. reported short term debts worth ₹80 Crores, long term debts worth ₹ 220 Crores and total equity as ₹450 Crores, find the debt capital ratio of M/S ABC Ltd**

####
**Solution:**

**Total Debt =**Short Term Debt + Long Term Debt

**⇨**(80+220)

**⇨**₹300 Crore

**Total Capital =**Total Debt + Total Equity

**⇨**(300 + 450)

**⇨**₹750 Crore

**Hence, Debt Capital Ratio = Total Debt / Total Capital**

**⇨**

**300/750**

**⇨**

**2/5 or 0.4**

####
**Example 2: **

**The following information is available about M/S XYZ Ltd, find debt capital ratio of the firm.**

Sr. No | Particulars | Amount (in ₹ Cr) |
---|---|---|

1 | Current Liability | 400.00 |

2 | Non-Current liability | 120.00 |

3 | Share Capital | 180.00 |

4 | Money Reserved Against Share Warrants | 800.00 |

5 | Reserves and Surplus | 50.00 |

####
**Solution:**

**Total Debt =**Current Liability + Non- Current Liability

**⇨**₹520Crore

**Total Capital =**Total Debt + Share Capital + Money Reserved Against Share Warrants + Reserves and Surplus

**⇨**₹1030 Crore

**Debt Capital Ratio =**Total Debt / Total Capital

**⇨**520/1030

**⇨**52/103

**Hence, Debt Capital Ratio = 52/103 or 0.5**