Legal Definitions - common-stock ratio

Definition: The common-stock ratio is the proportion of outstandingcommon stock to the total capitalization of a corporation. It is used to measure the relative claims of stockholders to earnings, cash flow, and equity.

The common-stock ratio is calculated by dividing the outstanding common stock by the total capitalization of the corporation. For example, if a corporation has $10 million in outstanding common stock and a total capitalization of $50 million, the common-stock ratio would be 20%.

The common-stock ratio is important because it helps investors understand the level of risk associated with investing in a particular company. A high common-stock ratio indicates that the company is relying heavily on equity financing, which can be risky if the company experiences financial difficulties. On the other hand, a low common-stock ratio indicates that the company is relying more on debt financing, which can also be risky if the company is unable to make its debt payments.

For example, if a company has a common-stock ratio of 80%, it means that 80% of its total capitalization is in the form of common stock. This indicates that the company is relying heavily on equity financing, which can be risky if the company experiences financial difficulties. On the other hand, if a company has a common-stock ratio of 20%, it means that only 20% of its total capitalization is in the form of common stock. This indicates that the company is relying more on debt financing, which can also be risky if the company is unable to make its debt payments.