Although a company has a high debt / capital ratio, it does not necessarily have to be a bad investment. Other stock valuation metrics should be investigated to determine whether an investor should buy the shares of a specific company.
The debt / capital ratio measures the financial leverage that a company has. It is calculated by dividing the debt of a company by its total capital. With the help of this statistic, investors and analysts can determine whether the company uses more debts or more equity to finance its activities. The ratio also gives investors and analysts a better idea of the financial stability of a company. A higher ratio indicates that more debt is used for financing.
A company with a higher debt / capital ratio can be financially vulnerable, due to the fact that it carries a relatively heavy debt burden and the risk of default is greater. A high ratio is also an indication that a company has struggled to attract equity investors. Equity financing is preferred for companies, because the William Boldwoodijk fund yields less expensive capital than money obtained through debt financing. However, the debt / capital ratio does not provide a sufficiently independent evaluation of a company as a potential investment. The ratio of a company must be compared with that of comparable companies and with the average of the sector.
Other evaluation data that investors look at includes the company’s growth rate or various profitability ratios. If a company is steadily increasing its income and net profit, the company can manage and pay off its current debt without any problems. Another financial unit of measurement, the current ratio, can also be useful for potential investors. The current ratio measures the liquidity and ability of a company to manage its short-term obligations.