Total Debt: What is It, Calculation, Importance, Applications, Advantages, Risks & More

Total debt is a financial metric representing the aggregate amount a company owes to external creditors, encompassing both short-term (due within a year) and long-term (payable over a longer horizon) obligations.

This financial metric is a critical indicator of a company’s leverage, helping investors and analysts assess its financial health, liquidity, and overall risk profile.

To calculate total debt, you need to combine all short-term and long-term interest-bearing liabilities listed on the company’s balance sheet. The formula is:

Total Debt = Short-Term Liabilities + Long-Term Liabilities

• Short-term liabilities: Obligations due within one (fiscal) year, such as accounts payable, short-term loans, lines of credit, and accrued expenses.
• Long-term liabilities: Debts maturing beyond one year, including bonds, mortgages, and deferred tax obligations.

For instance, if a company reports $500,000 in short-term liabilities and $1,500,000 in long-term liabilities, its total debt equals $2,000,000.

Let’s consider a hypothetical scenario to calculate total debt using different numerical figures.

Company ABC’s Liabilities

• Short-term loans: $50,000
• Current portion of long-term debt: $25,000
• Long-term loans: $300,000
• Bonds payable: $150,000

1. Determine all short-term liabilities:

Short-Term Liabilities = 50,000 + 25,000 = 75,000

2. Combine all long-term liabilities:

Long-Term Liabilities = 300,000 + 150,000 = 450,000

3. Add the two categories to find total debt:

Total Debt = 75,000 + 450,000 = 525,000

Result: Company ABC’s total debt is $525,000.

Understanding total debt helps investors, analysts, and businesses evaluate financial stability, operational efficiency, and creditworthiness.

Total debt provides a snapshot of a company’s leverage, indicating how dependent it is on borrowed funds. Companies with excessive debt may struggle to meet obligations during economic downturns, while those with manageable debt often enjoy greater financial flexibility.

Credit rating agencies and lenders use total debt as a critical input when determining a company’s creditworthiness. High debt can lead to unfavorable terms for future borrowing, such as increased interest rates, while manageable debt fosters confidence among creditors and investors.

For investors, total debt is a benchmark to evaluate the risks and rewards of investing in a company. A balance between debt and equity often indicates that the company is leveraging borrowed capital effectively without compromising financial stability.

Total debt is frequently used alongside other metrics like debt-to-equity ratio or EBITDA to compare companies within the same industry.

This ratio measures the proportion of debt to shareholder equity:

Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity

Comparing total debt to shareholders’ equity provides insights into the company’s leverage. A high ratio may signal risk, while a lower ratio often indicates stability.

This metric evaluates the proportion of a company’s assets financed through debt. It is calculated as:

Debt-to-Asset Ratio = Total Debt / Total Assets​

A higher ratio suggests potential overleveraging.

This ratio assesses a company’s ability to cover interest expenses with operating income:

Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense​

Ratios like interest coverage measure a company’s ability to service its debt. For instance, a low interest coverage ratio may indicate difficulty in meeting interest obligations.

For startups, total debt represents the initial capital raised for operations. Managing these debts effectively is crucial for survival and growth.

Established firms often leverage debt for acquisitions or infrastructure investments. For instance, companies in capital-intensive sectors like manufacturing might use long-term loans to modernize equipment.

Investors assess total debt to determine a company’s financial health and potential for growth. Balanced debt levels are often viewed as a sign of strategic financial planning.

• Growth Opportunities: Debt financing allows businesses to expand without issuing additional equity, preserving ownership.
• Tax Benefits: Interest payments on loans are typically tax-deductible, reducing taxable income.
• Flexibility in Capital Management: Companies can adjust their debt levels based on market conditions and operational needs.

• Debt Overload: Excessive borrowing can lead to unsustainable interest obligations, increasing bankruptcy risk.
• Economic Vulnerabilities: Companies with high debt levels are more exposed to economic downturns or rising interest rates.
• Reputation Damage: Over-leveraged firms may receive credit downgrades, deterring investors and creditors.

InvestingPro offers detailed insights into companies’ Total Debt including sector benchmarks and competitor analysis.

Net debt subtracts cash and cash equivalents from total debt, offering a clearer picture of a company’s leverage by accounting for liquid assets.

Short-term debt indicates immediate obligations that might impact a company’s liquidity. High short-term debt relative to current assets could signal financial strain.

Not necessarily. High total debt can be beneficial if used to finance growth opportunities that generate strong returns. However, excessive debt without corresponding revenue growth poses risks.

Yes, companies with high debt levels might experience stock price volatility, especially if they face difficulties meeting their obligations or refinancing at favorable rates.