Why long-term debt to capitalisation ratio matters to a first-time founder
A high result signals that lenders fund much of the company’s lasting capital base. That can amplify returns when trading is strong, but fixed repayments remain when revenue falls. Founders should understand this pressure before borrowing, raising equity or agreeing financial covenants.
Examples of long-term debt to capitalisation ratio
A company has $300,000 of long-term debt and $700,000 of shareholders’ equity. The ratio is $300,000 ÷ ($300,000 + $700,000) × 100 = 30%. In other words, long-term borrowing supplies 30% of the capital included in this calculation.
Common misunderstanding
It is not the share of all assets financed by debt. The denominator combines long-term debt and equity, while the long-term debt to total assets ratio uses total assets. Definitions of debt may also vary, so compare figures calculated on the same basis.
When to use it
Use it when reviewing a financing proposal, comparing capital structures or checking whether borrowing has become excessive. Track it consistently across reporting periods and against similar businesses. An early pre-revenue company may learn more from cash runway than from this ratio alone.
US spelling: long-term debt to capitalization ratio.