Debt is a fact of life for government and business alike. Defining and calculating total debt is part of financial management, whether you're the federal government or a start-up company. There's no one total debt definition because the total debt meaning varies with the context. "Debt" isn't as precise an accounting term as "liabilities".
TL;DR (Too Long; Didn't Read)
Business defines total debt as the total outstanding loans and bonds issued, or as the sum total of all liabilities, which includes accounts payable and other amounts. The definition depends on the context. The federal government defines total debt as the total of all federal debts and purchased Treasury bonds.
The Total Debt Meaning for Business
In business, there's more than one total debt meaning because there's more than one meaning for debt. When a C-suiter talks about their company's debt, it could mean their formal written loans and bonds payable. Alternatively, they could be talking about total liabilities: loans, bonds, unpaid bills, accounts payable and taxes.
This shouldn't be a problem if you keep context in mind. When someone discusses the total debt/equity meaning, they're talking about total debt as the company's total liabilities. The ratio compares total liabilities to the equity, the value of the assets over and above the liabilities; the larger the ratio, the more heavily leveraged the company is.
If someone is discussing total debt while talking about your company's outstanding loans, they're probably going with the other definition, total outstanding loans and bonds. If you're unclear from the context, there's no harm in asking.
Total Debt Definition in Government
The federal government classifies and divides up government debt in multiple ways:
- Short term vs. long term
- Long-term debts issued, retired and outstanding
- Debt backed by the government, unguaranteed debt and debts where the classification isn't specified
- The purpose of long-term debt. These include schools, utilities, parks and recreation, pollution control, air transportation and highways
The government defines its total debt as the sum of four different categories:
- Government debt held by federal government accounts. This is primarily trust funds that invest in federal securities to finance Social Security, Medicare and military retirement, for example.
- Debt held by people or organizations outside the federal government.
- The U.S. Treasury's debt obligations including short-term notes and money borrowed for the Federal Financing Bank.
- Federal agencies' debt obligations. These include the FHA, FDIC and the United States Post Office, among others.
Knowing the total debt meaning in the context you're dealing with enables you to use it effectively. For example, if you're talking about total debt meaning total liabilities, you know you can use the figure in the company's total debt ratio formula.
The debt/equity ratio compares total liabilities to equity, which is asset value minus liabilities. If, say, your company is worth $10 million and you have $3 million in total liabilities, the owner's equity is $7 million. If the company went bankrupt, the owners would have $7 million to divide up after paying off all the company's debts.
The ratio says you divide the $3 million by $7 million giving you 43%, rounded off. The higher the ratio, the greater the risk for creditors and potential investors. Greater debt means more debt payments, which strains your cash flow and makes it harder to stay afloat.
Long-Term vs. Current Debt
When you're gaining information about a company's finances, total debt by itself may not tell you enough. Total debt includes both current and long-term debts, those that will be paid off in a year and those that will take longer to settle. Current debt and the next 12 months of payments on long-term debt are current liabilities.
Even if your debt/equity ratio looks good, if you have a lot of current liability, you may have a problem. Financial analysts use the current ratio of current assets to current liabilities. If liabilities are more than assets, there's a strong potential for a cash shortfall.
With any ratio, it helps to compare one company to similar businesses in the same industry. It's possible that what looks alarming is actually the norm for the industry and therefore less of a red flag.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com