Funded debt is long-term debt, while unfunded debt is short-term. A company’s debt can be measured through ratios that compare funded debt to capitalization or financial structure. Excess debt can limit growth and borrowing capacity. Analysts can characterize credit obligations in different ways.
Funded debt represents the amount of long-term debt a company has on its balance sheet. Refers to bonds or other debt instruments that will mature in more than one calendar or fiscal year. Unfunded debt is the alternative, and represents loans that will mature in less than a year. A borrower is obligated to make interest payments on the debt to their lenders over the life of the loan. Excess financed debt on a company’s balance sheet can inhibit that entity’s growth and borrowing capacity or its ability to obtain future loans.
Long-term debt can be measured in a number of ways, one of which is a ratio that compares funded debt to capitalization or financial structure. This is a measure of a company’s long-term liabilities compared to equity ownership. To measure a company’s capitalization ratio, long-term debt is divided by the sum of long-term debt and shareholders’ equity. The result is multiplied by 100 to obtain a percentage that represents the portion of a company’s total financial structure due to debt.
A company’s debt to financed equity ratio represents its long-term debt relative to its equity. It is an equation that divides a company’s financed debt by its total assets. The result multiplied by 100 is a percentage that represents your debt financed ratio. Depending on certain parameters, such as the industry in which a company operates, the criteria for a healthy relationship will vary. A low percentage represents a stable balance sheet and presents options on how to deploy future capital.
A high level of funded debt compared to equity demonstrates a reliance on debt to finance a company’s long-term operations, and that could restrict future growth and lead to shareholder disapproval. While some debt may be necessary on a balance sheet, too much could be especially damaging during tough economic times, because the company is required to make interest payments to its creditors. It could also limit a company’s access to more loans at favorable rates.
There are several types of debt, including long-term debt, short-term debt, and operating liabilities, all of which are classified separately on a company’s balance sheet. When addressing a company’s debt, these financial analysts can characterize these credit obligations in one of several ways. It is the job of analysts to research, analyze and rate companies based on criteria that include debt and equity.
An analyst who takes a liberal view of debt refers only to the financed debt of a company. A more moderate view addresses long-term and short-term obligations. Analysts who take a conservative view of a company’s debt consider its long-term and short-term liabilities, plus deferred taxes and upcoming employee retirement benefits.
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