Debt-to-Market-Cap Ratio

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The balance sheet provides an overview of company assets and how the assets were secured. The balance sheet equation is assets equal liabilities plus stockholders' equity. Debt is considered a liability and is listed on the balance sheet as either short-term or long-term debt. The debt-to-market-capitalization ratio is used to measure a company's debt against its market size rather than asset size.

Balance Sheet

  • The annual report provides an overview of company operations. Specifically, it provides a balance sheet, income statement and cash flow statement. The balance sheet provides values for company debt. Debt due in less than one year is considered short-term or current debt. Debt due in more than one year is considered long-term debt. Total debt is the sum of both short-term and long-term debt.

Market Size

  • Market capitalization is used by investment analysts to describe the size of a company in the market. It is calculated by multiplying the number of shares outstanding by the current market price of the stock. The number of shares outstanding is usually listed directly on the balance sheet in the stockholders' equity section. You may also be able to use the notes at the end of the annual report to find more information about the number of shares outstanding. You can obtain the current share price by contacting the company's investor relations department or your broker.

Example

  • As an example, assume the current market price for a share of stock is $10 and the total number of shares outstanding in the market is 1 million. The total market capitalization is $10 million.

Interpretation

  • Dividing the company's total debt by the market capitalization provides a measure for how much debt the company has in contrast to its market depth. In comparison to debt to assets, debt to market capitalization gives the investor a way to measure debt against the firm's ability to raise capital. Comparing the two provides the investor with another way to test the financial viability of a company.

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