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Net Debt As A Percentage of Total Capitalization

The debt to capital ratio measures the percentage of a company's total capital that consists of debt. It is an important ratio for creditors, as a high ratio means a company relies heavily on debt for financing rather than equity. For Le Chateau, the ratio is 55.56%, indicating over half of its total capitalization comes from debt. This level of leverage leaves the company vulnerable in times of declining sales, as it still must make large interest payments on outstanding debt. The ratio enhances comparability between companies and shows creditors which firms use less leverage and are less risky.

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382 views1 page

Net Debt As A Percentage of Total Capitalization

The debt to capital ratio measures the percentage of a company's total capital that consists of debt. It is an important ratio for creditors, as a high ratio means a company relies heavily on debt for financing rather than equity. For Le Chateau, the ratio is 55.56%, indicating over half of its total capitalization comes from debt. This level of leverage leaves the company vulnerable in times of declining sales, as it still must make large interest payments on outstanding debt. The ratio enhances comparability between companies and shows creditors which firms use less leverage and are less risky.

Uploaded by

joeydanza
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Net debt as a percentage of total capitalization (debt to capital)

From a creditors point of view, the net debt as a percentage of total capitalization ratio is extremely
important. It measures to percentage of debt that makes up a companys total capitalization. A high
debt to capital ratio means that the company finances its operations mostly through debt as opposed to
equity. If a company is financed entirely through debt, then depending on their interest coverage, they
may not be able to make interest payments on their loans if there is a decline in revenue.

Le Chateaus ratio is 55.56%. this means that for every $10 in total capitalization, the company has $5.55
in debt. The majority of their financing comes from debt as opposed to equity. A high ratio makes the
company vulnerable in times of declining sales because the company still has to pay fixed interest
payments on all the debt it has.

The debt to capital ratio enhances comparability for financial statement users since it looks at debt as a
percentage of its capitalization. This makes comparing companies of different market caps easier.
$100,000 in loans for a $500,000 company will have a much bigger impact on it than on a company
thats worth $1,000,000. Creditors want companies with a lower ratio because this means they use less
leverage and thus there is less chance the company will default on its obligations. Net debt is used in the
calculation as opposed to gross debt because it is assumed that all cash and cash equivalents can be
used to pay off that debt.

Net debt as a percentage of total capitalization = (net debt)/(shareholders equity + net debt)

Net debt = all interest-bearing debt cash and cash equivalents

Net debt = Credit facility + long term debt + bank indebtedness + current portion of credit facility +
current portion of long term debt cash = $61,132,000 (long term debt) + $14,337,000 (short term
debt) cash = $75,469,000

Shareholders equity = $60,354,000

Net debt as a percentage of total capitalization = $75,469,000/($60,354,000 + $75,469,000) = 55.56%

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