Debt capital ratio — mine and yours
What is the debt capital ratio? - The definition
Die Debt capital ratio is a central business indicator that indicates the share of borrowed capital in the total capital of a property or a real estate portfolio. It shows the extent to which an owner is dependent on external financing and therefore has repayment obligations to lenders. The debt ratio is often used in conjunction with the equity ratio and the debt ratio to assess the financial stability and independence of a real estate portfolio.
What is debt capital?
that Debt capital consists of external financial resources, which appear on the liabilities side of the balance sheet. It comprises short, medium and long-term liabilities to creditors who have no influence on corporate decisions, but are primarily interested in repayment and interest payments. Typical borrowed capital items include:
- mortgages
- Passive accrual items
- Liabilities to banks
- Vendor liabilities
- Down payments for future benefits
- Other liabilities and liabilities
How do you calculate the debt ratio?
Die Debt capital ratio is expressed as a percentage and is obtained by dividing the borrowed capital by the total capital and multiplying the result by 100.
example: You buy a property privately for CHF 600,000 and finance 20% of it from your own funds. Accordingly, the debt capital amounts to CHF 480,000 and the equity to CHF 120,000. Your debt capital ratio is therefore CHF 480,000/120,000 x 100 = 80%.
How do you interpret the debt ratio?
A high debt capital ratio shows that a person or a company is heavily dependent on external financing. This can impact the company's earnings and liquidity, as regular payments are required for interest and repayment. On the other hand, due to the leverage effect, a high debt capital ratio allows for higher returns on profitable investments than if only one's own funds were used.
While private owners and smaller real estate investors generally exploit the legal maximum of 80% for the debt capital ratio for private owners and 75% debt capital ratio, large portfolio holders such as pension funds or listed real estate funds are often more cautious: A high debt capital ratio means that the distribution return of the portfolio depends not only on the real estate market, but also on the capital market and interest rate developments.
Debt capital ratio vs. debt ratio
While the debt ratio describes the ratio of debt to total capital, the Debt ratio represents the ratio of debt to equity. In a business context, a debt ratio of over 100% already indicates a relatively high level of indebtedness compared to equity and thus indicates greater dependence on external investors. For real estate purchases, a debt ratio of around 400% is normal, which is due to the high stability of real estate in value.
What is the leverage effect?
The Leverage effect describes how the return on equity can be increased by specifically increasing borrowed capital. As long as the return achieved exceeds borrowing costs, the leverage effect can significantly improve the return on equity. However, legislators set clear guidelines for real estate; for investment properties, a maximum leverage of 3x on equity is allowed (75% debt capital, 25% equity).
.png)