Capitalization of a company defines long-term capital of a company and is a blend of financial debt and equity contribution by the shareholders. Ratio of equity to debt in a business’s investment framework is an indication of its economical fitness and higher the equity part of the investment in a company as compared to financial debt element that the company is measured as financially strong.
What comprises equity and debt
The equity part of a company is very easily defined as the grouping of investments in various equity, preferred equity and the retained earnings as reserve. Total invested equity value combined with financial debt give support to business’s growth and creates various assets.
Definition of financial debt is also not difficult. Financial debt has the two features in a company:
Working capital debt and debt towards liabilities
Debt liabilities are the amounts that figure out the capital factor of a company. Financial experts and investment research corporates actually differ in factors to be taken to assess the financial debt liability of company. A disciplined interpretation of the financial debt liability means that a stock investor should consider short-term debts, the current outstanding part of long-term debt, long-term financial debt,redeemable preference shares and 2/3 of the principal value of operating leases.
How to check capital structure?
Various percentages are used to figure out the capital structure of a company. The most significant being the Debt ratio = liabilities/ assets; Debt-equity ratio = liabilities/ equity fund and Capitalization ratio = Net total debt/Total capital employed.
Capitalization ratio is regarded as more accurate than other ratios as it analyzes the financial debt part of a business’s investment framework (sum of financial debt and investor funds) with total capital employed in the company. A low rate is an indication of a healthy equity support.***
Sensible use of borrowed fund in a company helps in increasing the value of financial assets accessible to the company as this would suggest that the organization has earned more from debt after paying interest and charges for the borrowed fund. In fact, there is no model debt-equity ratio, but financial students advised to assess a company as good if the current ratio which is ratio of business’s assets to liabilities is 2:1. Essentially, the most debt/equity structure is determined by various factors like type of industry, its production and its stage of development. An investor should look into a lower capitalization ratio in the market scenario for buying of share of a company.
A starter in the market should consider the statistical factors to assess quality of investment strategies to be able to earn reasonable profits at the beginning. A direct drive into the sea of stock market can bring down the invested fund into huge failures. I had a dreadful experiences while coming into the stock market without much help. I then started reading information books, various stock market reports on investment and found some standard factors as a thumb-rule to buy shares of a company. The achievements in the stock market by use of the factors convinced me to write this article so that new investors/ traders in stock market can make sure achievements from the point of access into share trading.