Definition:

Total Debt refers to the sum of all short-term and long-term debt that a company owes to its creditors. It includes loans, bonds, and other forms of financial obligations.

Examples

1. A company with a $500,000 bank loan and $200,000 in bonds would have a total debt of $700,000.
2. If a business has $300,000 in short-term debt and $700,000 in long-term debt, its total debt is $1,000,000.

Formula:

Total Debt = Short-term Debt + Long-term Debt

How to use the metric:

Total Debt is used to assess a company's financial leverage and risk. Investors and analysts examine total debt to understand the company's capital structure and its ability to meet financial obligations. It is often compared to equity or assets to evaluate financial health.

Limitations:

Total Debt does not provide insights into the company's ability to service its debt. It also does not account for the interest rates or terms of the debt, which can significantly affect financial stability. Additionally, it does not consider off-balance-sheet liabilities.

Applies to:

Total Debt is applicable across most industries, especially those with significant capital expenditures such as manufacturing, utilities, and telecommunications, where companies often rely on debt financing.

Doesn't apply to:

It may be less relevant for industries with minimal capital requirements, such as software or consulting, where companies might operate with little to no debt. In these industries, other financial metrics might be more indicative of financial health.

Summary:

Total Debt is a crucial financial metric that provides insight into a company's financial obligations. It helps stakeholders assess leverage and potential financial risk, although it should be considered alongside other metrics for a comprehensive analysis.