What Is Capitalization When Doing a Pro Forma Statement?

Capitalization involves projecting ways to plan for debt in a company.

A pro forma statement is a planning tool used by many businesses. This statement plans and projects for the future of the company. Capitalization is part of many pro forma statements and refers to ways a company plans to pay for short-term and long-term debts.

Purpose

The purpose of a pro forma statement is to plan for the future of a company. A pro forma statement is set up like any other financial statement. The difference is that the numbers on the pro forma statement are projected amounts.

Capitalization

Capitalization is something a company tries to predict. It is often shown by calculating a common ratio known as the capitalization ratio. This ratio is a measure of a company's debt structure.

Calculation

To calculate the capitalization ratio in a company, the total long-term debts are divided by the total of long-term debts plus shareholders' equity. The answer to this represents the company's capital structure, or capitalization.

Meaning

Capitalization gives managers of a company insight into the company's use of leverage. There is no perfect answer to the ratio, and all industries' capitalization rates vary. This number is useful in predicting for future expansions of the company. It can tell whether or not a company believes it will have the ability to repay debts in the future.

References

• Commercial Real Estate Articles: Capitalization Rate
• Clarity Accounting: Pro-Forma Statements
• Investopedia: Debt Ratios/Capitalization Ratios
• Accounting Coach: What Is Capitalized Interest?