# Coefficient of capitalization and its calculation

As a rule, the capitalization coefficientIt is used in those cases when the conversion of net income directly into the value of a specific object 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 purchasethis object. The indicator, which reflects the relationship between these two parameters, is called the capitalization rate, and the term "total capitalization ratio" is also used in the economic literature. At the same time, the value of the net income that participates in calculating the coefficient in question is taken for a specific period, most often in one year.

The total capitalization ratio demonstratesinteraction 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 enterprise's revenues in relation to the projected cost of this enterprise in 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 object. 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 the given object.

In addition to this value, the capitalization factorcan be used as a very accurate indicator of the financial performance 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 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 leverage, the ratiocapitalization 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 notis established by some normative act or by other directive means, because it is almost 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, in which equity in size predominates over the amount of borrowed funds. However, this observation should not be absolutized, since the use of only own capital can significantly reduce profits from the investments of owners.