Total Debt encompasses all of a company’s borrowings that incur interest, such as bank loans, bonds, commercial paper, and lease obligations. It provides a comprehensive view of the company’s financial leverage by combining current and non-current debt.
Why is Total Debt Important?
Total Debt is important because it:
Indicates Financial Leverage: Shows how much the company relies on borrowed funds versus equity financing.
Affects Creditworthiness: Lenders and rating agencies use total debt to assess default risk and determine borrowing costs.
Impacts Cash Flow: Debt service (interest and principal repayments) influences cash flow availability for operations and investments.
How is Total Debt Calculated?
On the balance sheet, Total Debt is calculated as the sum of all interest-bearing obligations:
Total Debt = Short-Term Debt + Long-Term Debt
Where:
Short-Term Debt: Obligations due within one year (e.g., bank overdrafts, commercial paper, current portion of long-term loans).
Long-Term Debt: Obligations due after one year (e.g., bonds payable, notes payable, capital lease obligations).
Additional Considerations
Net Debt: Companies often calculate Net Debt by subtracting cash and cash equivalents from Total Debt to gauge true leverage.
Debt Covenants: Review agreement terms, including covenants that may restrict additional borrowing or require maintaining certain financial ratios.
Maturity Profile: Analyze the timing of debt maturities to plan refinancing and manage interest rate exposure.