Capital Ratio Definition and Explanation

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Quick Definition

Measures the equity and debt required to attain its long term assets.

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Capital Ratio Formula

Explanation of Capital Ratio

The Capital Ratio measures the amount of equity and debt funding that has resulted in the company acquiring a certain level of Net Property Plant Equipment. Most long-term, fixed assets are financed by either an infusion of equity from stockholders or from debt financed from banks.

Importance of Capital Ratio

A decreasing Capital Ratio is usually a positive sign, as this shows the company may have a higher proportion of fixed assets when compared to its total equity and debt. The company may have paid down some debt, or possibly bought back some of its stock while maintaining its amount of fixed assets.

An increasing ratio may indicate the company has taken on more debt or completed another round of securing equity, but less of a proportion was spent on fixed assets. The company may have also sold some of its fixed assets, causing the ratio to skew upwards.