Capitalization Ratios

  

Big companies carry big debts, at least in total terms.

GlobalMicroTechBioPharma Corp. owes $10 billion to people in various forms, through things like borrowing from banks and bond issuances. That amount sounds like a lot, but the company also has $100 billion in annual revenue. So, keeping up with the debt service payments isn't a big deal.

Like how some people might get evicted from a $250,000 house because they can't afford the mortgage payments. Meanwhile, Elon Musk can easily keep up with the payments for many multi-million dollar mansions. Something affordable for one person might be out of the question for other people. Different people can handle different debt levels.

But how does a company know whether its debt levels are too high? Capitalization ratios. These figures show the amount of debt a company has compared to the amount of other capital it has (especially equity).

A few types of capitalization ratios exist.

You've got the Debt-to-Equity Ratio. It shows the amount of debt that a company has, versus the amount of equity it has issued.

You've got Long-Term Debt-to-Capitalization ratios. This figure indicates the amount of debt a company has compared to its total capitalization. The total capitalization includes both the debt and the shareholders' equity.

Then you've got the Total Debt-to-Capitalization ratio. This number compares the company's total debt to its total capitalization.

That's the holy trinity. Pray to them often.

Related or Semi-related Video

Finance: What is recapitalization?34 Views

00:00

finance a la shmoop what is recapitalisation all right people think

00:07

nee capitalization you know in Jersey like when you owe the mob money at least [thug breaks knee with bat]

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that's what it feels like if you're a common equity stockholder of a company [businessman with common stock]

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that has been recapped well usually recapitalisation is a very kindly loving

00:23

politically correct term for a pal you're bankrupt you borrowed money you

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promised to pay back and you didn't so now you're out and the lenders now own

00:33

your company buh and buy so typical recap comes from a company that was very

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early stage and had preferred stock upon preferred stock from venture capital

00:45

investors sitting above their common in the priority stack and eventually the

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company burned through eighty seven million dollars and it has just a [dollars on fire]

00:54

million bucks left in the bank and it built something out of that eighty seven [company logo graveyard]

00:58

million not quite worth putting here yeah but it might be worthy of a new

01:02

investment of say yo thirty million or more dollars but the marketplace values [money going into company briefcase]

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this zombie company yes that's what they're called at a [zombie briefcase walking at night]

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value well less than the eighty seven million that has been raised previously

01:15

so everything is marked down usually with a common in total being worth [store during closing sale]

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something like one percent of the new company and that's oh so sad for the

01:23

founders because it was a hundred percent of the company the day they

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started so they were recapped and lest more mature companies feel left out well

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recapitalisation happens in later stage companies as well and the radio industry

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famously took on too much debt in the late 1990s and then people stop [radio knob getting changed]

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listening to Drivetime radio as cell phones and satellite radio intruded I

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bring radio borrowed five billion dollars at seven percent to oh three

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hundred fifty million a year and then when cash earnings fell well below that

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number while the company had to recap its five billion of debt such that those

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debt holders now own essentially all of I brain radio and hope to someday milk

02:03

enough cash out of it to get their principal back knowing and it'll likely [goat getting milked]

02:06

be a very low interest rate or a low return on their and

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if a positive one at all hopefully that all made sense you the first time though

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because well we don't have time here in this video for a recap

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