A financial ratio that relates total debt to total capitalization (capital structure). It tells about how much the company is operating on its equity, i.e., using its own equity to finance its operations and future growth. It reflects the use of financial leverage by the company:

Capitalization ratio= long-term debt / (long-term debt + shareholders’ equity)

Companies with high capitalization ratio are deemed to be risky in terms of its the risk of insolvency associated with its potential inability to repay its debt on time. This also means such companies may find it difficult to have access to additional loans in the future.

However, higher financial leverage may positively impact the return on a shareholders’ investment due to the tax reliefs derived from borrowed funds (leverage).