Tuesday, January 11, 2011

Fun facts: debt-to-capital ratio

What is a corporate debt-to-capital ratio and why shouldn't I fall asleep when reading about it?

In the simplest terms a debt-to-capital ratio is a company's total debt divided by its total capital. The higher the ratio, the more leveraged the company is and the more it relies on debt financing. According to the financial website Investopedia.com "A company with high debt-to-capital ratios, compared to a general or industry average, may show weak financial strength because the cost of these debts may weigh on the company and increase its default risk."


No wait! This is important. Pink Slips and Parting Gifts is a story about a company with a moderate debt-to-capital ratio which was gobbled up by by a competitor. The competitor borrowed heavily to make the acquisition. Then its debt-to-equity ratio shot sky-high. Add a collapsing real-estate market, plus a recession, and what do you get? A more familiar financial term: bankruptcy.

Good news for staying awake while reading—Pink Slips and Parting Gifts is less about financial "arcania" and more about the human fallout of corporate financial failures.

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