Definition of Total Debt

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Total debt is a term used most often when discussing organizational finances from the macro perspective. Businesses use many types of analysis to study their operations, including funding, liabilities and revenue streams. But sometimes analysis also requires a wider look, an inspection of how the business stands regarding all its the debt.

Business Definition

From a business perspective, total debt is a combination of both short-term and long-term debt. Short-term debts are those that must be paid back within a year. This type of debt applies to things like lines of credit or short-term term bonds. Long-term debt generally includes every liability that must be paid off in more than a year. This typically includes large senior debts like mortgages and loans to purchase equipment or construct buildings.

Government Definition

Total debt has a more complex definition when it comes to governments and nations. A country's total debt is determined by adding up all the debt that the government has amassed, usually by borrowing from other nations but also by issuing debt to the public. Then the debt that all financial institutions hold is added into the mixture. Last, all other business debt is compiled and household debt is added in to create a clearer picture. This shows the country's debt in relation to the debt totals of other countries.

Debt to Assets Ratio

The debt to asset ratio is one of the most common uses of total debt. This ratio compares total debt to total assets, or the total worth a business has in things like cash and inventory. The ratio can be over one, indicating more debts than assets, or below one, showing that the company has more asset worth than liabilities.

Uses

The debt to asset ratio is used by both lenders and investors to investigate the financial position of a business (or nation, in some cases). Typically a lower ratio, with greater asset worth than debt, is a good sign, meaning that in a worst-case scenario, the business has the ability to sell off assets and pay off all liabilities. But this is not necessarily true: different industries have different norms for financial management, and some are expected to maintain a larger amount of debt than others for active business investment. Utility companies, for instance, have very stable sales and are expected to maintain high levels of debt by investors.

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