Debt Ratios



“Debt” is a concept relative to financial statement presentation. The “funded debt” and credit ratings will be discussed as well. 

Liabilities has two types, “operational” and “debt”. Operational contains balance sheet accounts, such as accounts payable, accrued expenses, taxes payable, and pension obligations. Debt, on the other hand, contains notes payable, other short-term borrowings, long-term borrowings’ current portion, and long-term borrowings. Furthermore, “debt” is commonly used with total liabilities in terms of investment literature. In some cases, it is referred as a firm’s indebtedness. 

The debt ratios that are commonly used are the explained ones in this tutorial. Calculating the ratios is far from the standard one of that company, financial analysts and investment research services use. 

Basically, debt analysis can fall into three categories, which comprises of liberal, moderate and conservative. It will be explained how debt apply is used and interpreted.  

Liberal – it minimizes the amount of debt, and as long-term debts are recorded in the balance sheet under a non-current liabilities.

Moderate – it is comprised of current borrowings, or notes payable, as well as the long-term debt’s current portion. It essentially appears in the current liabilities of a balance sheet, together with the long-term debt which can be seen under the non-current liabilities mentioned earlier. Moreover, it is considered as a redeemable preferred stock, as its quality is likely to a debt, and therefore, it is as regarded as a debt. Lastly, two-thirds of the outstanding balance of operating leases are considered debt, it doesn’t appear in the balance sheet. 

Conservative – all items are used in the moderate interpretation of debt are included, and non-current operational liabilities liked deferred taxes, pension liabilities and other post-retirement employee benefits. 

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