Coefficient of capitalization and its calculation

Typically, the capitalization factor is used in those cases where the conversion of net income directly into the value of a particular facility is required. If it is necessary to calculate it, the following factors are taken into account:

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

- funds that are used to purchase this facility. The indicator, which reflects the relationship between these two parameters, is called the capitalization rate, also in the economic literature the term "total capitalization ratio" is used. At the same time, the value of net income, which is involved in the calculation of the coefficient in question, is taken for a specific period, most often in one year.

The total capitalization ratio demonstrates the interaction between the parameters of net income, which are calculated for the year, and the market value of this particular facility. In the case when this coefficient is considered more widely, it adequately shows the ratio of the company's revenues in relation to the projected cost of this enterprise on the market. Thus, it turns out that this coefficient is inversely proportional to the duration of the payback period of the funds that are invested in this facility. Metrically it represents the percentage of net income, calculated as the average for the year, brought by those investments that are used as investments in this object.

In addition to this value, the capitalization coefficient can be used as a very accurate indicator of the effectiveness of the financial activity of an enterprise and its financial stability. In this context, this ratio reflects the ratio of the amount of payables to the aggregated amounts from all sources of financing. In this case, they include the company's own capital. This coefficient makes it possible to correctly estimate the amount of capital from the enterprise and to establish its sufficiency or insufficiency for financing any activity as its own capital.

In this sense, this coefficient is included in the list, the so-called indicators of financial leverage, that is, those that reflect the relationship between borrowed funds and the company's own capital. It also acts as an indicator of the degree of economic risk: for large values of the coefficient there is a higher degree of dependence of the enterprise or company on borrowed funds, and as a natural consequence - lower financial stability before the challenges of the market element. And, conversely, on the contrary, the value of the coefficient is greater, the return on equity is higher, and the financial stability in the market is higher. In this case, the capitalization coefficient is calculated as a quotient from dividing the value of the company's long-term liabilities by the amount of equity plus long-term liabilities.

As an element of financial leveraging, the capitalization coefficient also shows the structure of sources that can act as factors of its long-term financing. At the same time, it is necessary to distinguish the capitalization of the company from market capitalization, here it acts as the sum of two passives with high stability - long-term liabilities and own funds.

The normal value of the coefficient is not established by any normative act or by any other directive method, because it is practically impossible to do this 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 own capital in size predominates over the amount of borrowed funds. However, this observation should not be absolutized, since the use of own capital alone can significantly reduce profits from the investments of owners.