The capitalization ratio is one of the calculated values of financial leverage. Such an untranslatable English word is called a group of values that characterize the ratio between the company's borrowed funds and its own capital.
Instructions
Step 1
The capitalization ratio allows you to determine how great the dependence of the company's activities on borrowed funds. The higher this indicator, the greater the entrepreneurial risk of the organization. The term "company capitalization" in this case should not be confused with market capitalization, these are different concepts. The capitalization of a company is the total amount of capital investment in a manufactured object, consisting of its own and borrowed funds.
Step 2
Mathematically, the capitalization ratio is equal to the ratio of the value of long-term liabilities to the total value of long-term liabilities (borrowed funds) and own funds: KK = DO / (DO + SS).
Step 3
The capitalization ratio shows how great the influence of borrowed funds on net profit is. Accordingly, the larger the share of borrowed funds, the less the company will receive profit, since part of it will be spent on repaying loans and paying interest.
Step 4
A company, most of whose liabilities are borrowed funds, is called financially dependent, the capitalization ratio of such a company will be high. A company that finances its own activities with its own funds is financially independent, its capitalization ratio is low.
Step 5
Financial leverage is one of the three areas of the system of calculated values, the slightest fluctuations in which lead to significant changes in key indicators. Leverage literally translated from English means "lever". In this case, the influence of the capital structure on the amount of net profit is analyzed.
Step 6
There are no standard values for the capitalization ratio, since its value depends on the industry in which the company operates, on the technologies used. This ratio is important for investors who consider this company as an investment of their funds. Of course, they are attracted by companies with a large predominance of equity capital, i.e. more financially independent. However, the share of borrowed funds should not be too low, as this will reduce the share of their own profits that they will receive in the form of interest.
