If money makes the world go round, debt is the oil on its axis. Debt allows companies to buy large assets that would otherwise be inaccessible, and assets allow companies to generate profit through the sale of products and services.
But not all debt is equal. Some of it is short-term, some long-term; some of it is simple, some complex. In any case, the sum of all debt on the company’s balance sheet is its total debt.
This article defines total debt, shows the formula and related calculation, and provides examples using familiar companies’ financials such as NetFlix.
It also discusses key concepts such as debt vs liabilities, the importance of interest, the time value of money, and financial ratios involving debt. So you’ll walk away with a thorough understanding of the concept.
Total debt is the sum of all balance sheet liabilities that represent principle balances held in exchange for interest paid — also known as loans.
Total debt does not include short term liabilities such as accounts payable, deferred revenue, or wages payable, because these items do not involve the exchange of interest for principle. In other words, they’re obligations the company has towards other parties, but are not debt.
Total Debt on Balance Sheet
A company’s debt is found on its balance sheet. The balance sheet represents all a company’s
(1) assets (cash, rights to cash, rights to products or services, or material goods that can be used to generate cash), all its
(2) liabilities (obligation to disburse cash, obligations to provide products or services, or obligations to pay loan principle balances), and all its
(3) equity (money owed to investors including retained earnings, paid-in capital, and stocks).
Total debt is the sum of liabilities that consist of principle balances held in exchange for interest paid, aka loans. Unfortunately, these items are not labelled as such on the financial statements.
In order to find them, you need to know what you’re looking for on the balance sheet. I’ll show you how to do this in the example section below using NetFlix’s financial statements.
First, let’s understand what makes debt different form other liabilities.
The point is, debt is a special type of liability for which the time value of money plays a critical role, and as a consequence, interest payments are required on the principal amount.AnalystAnswers.com
Free Total Debt Standard Schedule
Debt vs Other Liabilities: Money for Interest
Debt is a special liability that represents money a creditor provides to a company in exchange for interest.
The money that the bank provides is called principal because it’s the driving value of the loan that determines its interest obligations. The company must pay the principal amount back to the bank in fixed installments, along with interest payments.
But why does a bank require interest payment? After all, when it gets the principal back, the bank has not lost any money — it breaks even.
If the bank has no variable costs to cover, then the interest rate should only be large enough to cover fixed costs and other operating expenses. Otherwise, another bank would come along and offer even cheaper interest rates.
The reason this does not happen is that there is a value associated with time, and when banks do not control a sum of cash because they lent it to a company, they’re actually losing money to inflation, and they’re losing the ability to invest it elsewhere. This idea is known as the time value of money.
Time Value of Money
Written simply, the time value of money is a concept that means “x money today is worth more than x money tomorrow” because it can be invested today and generate ROI by tomorrow, and because in a healthy economy inflation will decrease it’s value by tomorrow.
This may sound like finance mumbo jumbo, but it’s not. If you have handled even a small amount of money saved, you can see the effects of the time value of money on your holdings.
Banks know this all too well, which is why they charge interest rates that can sometimes seem aggressive.
The point is that debt is a special type of liability for which the time value of money plays a critical role, and as a consequence, interest payments are required on the principal amount held.
Other liabilities, such as accounts payable, do not involve interest payments because the time value of money is not as critical to the counterparty’s business as it is to banks.
Total Debt Formula
The total debt formula is total debt = short term debt + long term debt = normal schedule loans + revolving credit facilities = national loans + foreign loans.
Total Debt Calculation (Step by Step)
To calculate total debt, follow these steps (detailed example on NetFlix is found below):
- Collect the company’s financial statements. For public companies in the United States, go to sec.gov > company filings (located under the search bar). Search for the company’s 10-K or 10-Q, then click the “Filing” button. You’ll find a blue button titled “Interactive Data” where you can download the financial statements.
- Examine the notes for these items to determine which involve interest. Find the notes to financial statements (usually found just below the financial statements in the filing), which provide a written summary of major items. Most notes sections include a dedicated section for debt. This section explains what debt the company currently has, and explains nuances such as foreign holdings, types of debt, and netting of issuance costs.
- Cross check these items on the balance sheet and add them up. It’s important to ensure you see the connection between the notes section and the balance sheet.
- Break them down by significant category as outlined in the filing. Consider breaking them down as totals under headings such as foreign debt, short-term vs long-term debt, revolving facilities vs normal life maturities.
Short-term & Long-term Debt
Short-term debt represents obligations that are due in less than 1 year, whereas long-term debt is due in more than one year.
Current Portion of Long-term Debt vs Long-term Debt
Current portion of long-term debt represents the portion of a long-term principal amount that is due within one year. Most corporate loans are paid on a monthly basis, so this value on the balance sheet represents the sum of payments due from January – December in one year vs all payments over multiple years.
National vs Foreign Debt
There is an FX impact of debts held in foreign currencies, which means these debts are important to outline separately.
Standard schedule vs revolving credit facility
Corporate loans typically come in two forms — a standard schedule loan and a revolving credit facility. A standard schedule loan consists of fixed payments that are comprised of evolving amounts of interest and principal, whereas a revolving credit facility consists of a line of credit that can be drawn down and paid back month-over-month.
Make Sure You Can Work with Debt in Excel
Total debt either feels simple or overwhelming, depending who you are. It’s easy to assume you’ve grasped the topic but not be able to execute on it, or on the opposite end of the spectrum to feel like it’s a whole other world of information.
The best way to ensure you’ve “got it” is to play with examples in Excel. Below you can download a model debt schedule (used for this article, but transferable to any scenario). Play with it, and build the confidence you need to deal with total debt:
Free Total Debt Standard Schedule
Now, Let’s Dig In with an Example
Imagine a company has a credit line of $100,000/month with a daily rate of 0.05%. It uses $30,000 on January 1st. On January 2nd, her balance is $30,015 (30,000 + 30,000 * 0.05%). Let’s imagine two scenarios: one where it pays by the last day of the month (grace period) and one where she does not make the payment.
As you can see, the credit facility is more dynamic than the normal life loan because amounts can be drawn down at various times, and each amount begins to collect interest on a daily basis.
Total Debt Example
The best way to understand total debt is to look at an example, so let’s use Netflix’s financial statements as a reference. We start with the balance sheet to determine possible debt items:
As you can see, two lines are important for debt. In principle, I can add these two lines together to see what the total debt of the company is — $15,392,895 at 31-Dec-2022. This, however, is an elementary view of the company’s holdings.
To calculate total debt, it’s always better to investigate what’s underneath these lines to drive a more sophisticated understanding of the obligations. Let’s look at this below.
Total Debt Step by Step Example
Using NetFlix’s 2021 filing with the SEC, let’s go step by step to calculate total debt.
- Collect the company’s financial statements. Navigate to sec.gov > Company Filings (below search bar) > Search NetFlix (NFLX). You should arrive at this page:
From there, navigate to [+] 10-K (annual reports) and 10-Q (quarterly reports) > January 27, 2022 – 10-K: Annual report for year ending December 31, 2021. Click the Filing button. You should be on this page:
Click the first Seq one to open the filing. The use the table of contents to navigate to Financial Statements and Supplementary Data. When you scroll down to page 36 you’ll see another table of contents with the financials statements and notes. Click on the balance sheet to find the debt items:
As we saw above, we see total debt is $15,392,895 at 31-Dec-2022, split as $699,823 in short-term debt and $14,693,072 in long-term debt.
- Examine the notes for these debt items. Scroll down until you see a section called NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Keep scrolling to section 6 – Debt.
- Cross check these items on the balance sheet and add them up. It’s important to ensure you see the connection between the notes section and the official balance sheet. As you can see, the total $15,393 million balance sheet reconciles with the breakdown of notes in the image above once we add back $93 million issuance costs. We can also see that $700 million of this total belongs to short term debt (rounded from $699 million on the balance sheet).
- Break them down by significant category as outlined in the filing. We can break down NetFlix’s debt into the “categories” as shown in the table below to ensure we’re calculating total debt and not other liabilities.
Total Debt vs Net Debt
Net debt is a simple concept often used in the context of enterprise value that aims to show the total value of obligations a company has in the case of a liquidity event. The formula for net debt is net debt = total debt – cash.
By subtracting cash from total debt, we arrive at the theoretical value of obligations that would need to be paid in the event that a company were sold.
Outside the context of a sale, net debt provides an indicator of the company’s solvency. It shows the ability of the company to cover long-term debt with cash.
The debt-to-equity ratio compares a company’s total debt to total shareholder equity. It indicates how much leverage a company uses, and higher leverage indicates more risk to investors for two reasons. First, debt constitutes payments of interest that cannot be used to pay out dividends. Second, in the case of insolvency, debt is paid out before equity.
Total interest on total debt refers to all the interest owed or paid on the principal amount.
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