# The capitalization ratio and its calculation

As a rule, the capitalization rate is applied in cases where the required conversion of net income directly to the cost of a particular object.If necessary, the calculation takes into account the following factors:

- net profit created and received from the operation of any object;

- funds that are aimed at the acquisition of the object.The index, which reflects the ratio between these two parameters is called the capitalization rate, also in the economic literature, the term overall leverage ratio.The value of net income, which is involved in the calculation of the coefficient under consideration is taken for any specific period, usually one year.

total capitalization ratio shows the interaction between the parameters of net income, which is calculated for the year and the market value of the particular object.In the case where this ratio more widely considered, it adequately shows the ratio of business income with respect to the predicted value of the company in the market.Thus, it appears that this ratio is inversely proportional to the duration of the period of recoupment of funds that invested in the property.Metrically it represents a percentage of net revenues, calculated as an average for the year, brought in by the attachments, which are used as an investment in the property.

addition to this value, the leverage ratio can be used as a very accurate indicator of the financial performance of the enterprise and its financial stability.In this context, this represents a ratio of the amount payable to the generalized indicator of the amounts of funding.In this case, they include and equity businesses.This factor makes it possible to correctly estimate the amount of capital at the enterprise and establish its sufficiency or insufficiency of financing for any activity as equity.

In this sense, this factor is included in the list of so-called indicators of financial leverage, that is, those that reflect the ratio between debt and equity businesses.He also serves as an indicator of the degree of economic risk: for large values ​​of the coefficient there is a higher degree of dependence of the company or companies on borrowed funds, and as a natural consequence - lower financial stability to the challenges of market forces.And, accordingly, conversely, the coefficient is more, the return on equity is higher and the financial stability of the market higher.In this case, the leverage ratio is calculated by dividing the value of long-term obligations of the enterprise on the value of equity plus long-term liabilities.

As an element of financial leverage, the leverage ratio also shows the structure of sources that may be a factor of long-term financing.This should be distinguished from the capitalization of the company's market capitalization, it stands here as the sum of the two liabilities, highly resistant - long-term debt and equity.

Average value of the coefficient is not established by any normative act or other decision-making process, because it is practically impossible because of the large number of uncertain and random factors that affect the value of the coefficient.But as practice shows, investors are more interested in enterprises and organizations whose equity largest prevails over the value of borrowed funds.However, this observation should not be absolute, since the use of only equity can significantly reduce the return on investment of owners.