# Capital Structure (Solvency / Leverage) Ratios
These ratios examine the mix of debt and equity in a firm's financing and its long-term solvency. They are the lender's and rating agency's primary toolkit.
## Key Definitions
- Debt = Borrowed funds / Loan funds = Debentures + Long-term Loans from Banks & FIs.
- Equity (Shareholders' Funds / Net Worth / Proprietary Funds) = Equity Capital + Preference Capital + Reserves & Surplus − Miscellaneous Expenditure − Accumulated Losses.
- Capital Employed = Equity + Long-term Debt (or Total Assets − Current Liabilities).
## The Ratios
### 1. Debt to Total Assets
$$\frac{\text{Total Debt}}{\text{Total Assets}}$$
### 2. Debt Ratio
$$\frac{\text{Total Debt}}{\text{Net Assets}}$$
### 3. Equity to Total Funds Ratio
$$\frac{\text{Equity}}{\text{Total Funds}}$$
### 4. Equity Ratio
$$\frac{\text{Shareholders' Equity}}{\text{Net Assets}}$$
### 5. Debt-Equity Ratio
$$\frac{\text{Total Debt}}{\text{Equity}} \quad \text{OR} \quad \frac{\text{Long-Term Debt}}{\text{Equity}}$$
A D/E of 1:1 means equal debt and equity. A high D/E indicates leverage and financial risk.
### 6. Capital Gearing Ratio
$$\frac{\text{Preference Capital} + \text{Debentures} + \text{Other Borrowed Funds}}{\text{Equity Shareholders' Funds}}$$
- High Gearing → larger fixed-cost capital relative to equity → higher risk and higher EPS volatility.
- Note: Preference capital is treated as fixed-cost capital here, not as equity.
### 7. Proprietary Ratio
$$\frac{\text{Proprietary Funds}}{\text{Total Assets}}$$
Proprietary Funds (= Net Worth) = Equity Capital + Preference Capital + Reserves & Surplus − Misc. Expenditure − Accumulated Losses.
### 8. Fixed Asset to Long Term Fund Ratio
$$\frac{\text{Fixed Assets}}{\text{Long-Term Funds}}$$
A ratio < 1 means part of long-term funds are financing working capital — generally a healthy sign.
## Mental Model
- Debt-Equity → debt vs owners' funds
- Capital Gearing → fixed-cost funds (debt + pref) vs equity
- Proprietary → owners' stake in total assets
These ratios overlap but each highlights a different perspective on the same balance-sheet relationship.