Definition:

Total Capital refers to the sum of all financial resources that a company utilizes to fund its operations and growth. This includes both equity capital and debt capital.

Examples

A company with $500,000 in equity from shareholders and $300,000 in long-term debt would have a total capital of $800,000. Another example is a firm with $1 million in retained earnings and $500,000 in bonds issued, resulting in a total capital of $1.5 million.

Formula:

Total Capital = Equity Capital + Debt Capital

How to use the metric:

Total Capital is used to assess a company's financial structure and leverage. It helps in understanding how a company finances its operations and growth, and in evaluating the risk and return profile of the business.

Limitations:

Total Capital does not account for the cost of capital or the risk associated with different types of financing. It also does not provide insight into the efficiency of capital utilization or the company's ability to generate returns from its capital.

Applies to:

Total Capital is applicable across various industries, especially those with significant capital requirements such as manufacturing, utilities, and telecommunications, where understanding the capital structure is crucial for financial analysis.

Doesn't apply to:

Industries with minimal capital requirements, such as certain service-based sectors, may find Total Capital less relevant. In these industries, other metrics like cash flow or profitability may provide more meaningful insights.

Summary:

Total Capital is a key financial metric that represents the total financial resources available to a company, combining both equity and debt. It is useful for analyzing a company's financial structure and leverage but has limitations in assessing cost and efficiency. It is most applicable in capital-intensive industries.