Funded debt represents the amount of long-term debt that a company carries on its balance sheet. It refers to bonds or other debt instruments that will mature in more than one calendar or fiscal year’s time. Unfunded debt is the alternative, and represents loans that will mature in less than one year. A debtor is obligated to make interest payments on debt to its lenders over the term of the loan. Excess funded debt on a company’s balance sheet can inhibit that entity’s growth and debt capacity or its ability to obtain future loans.
Long-term debt can be measured in a variety of ways, one of which is a ratio comparing funded debt to capitalization or financial structure. This is a measure of a company’s long-term obligations in comparison with shareholder equity ownership. To measure a company’s capitalization ratio, long-term debt is divided by the sum of long-term debt and shareholder equity. The result is multiplied by 100 to obtain a percentage that represents how much of a company’s total financial structure is because of debt.
A company’s funded debt-to-equity ratio represents its long-term debt in relation to its equity. It is an equation that divides a company’s funded debt by its total assets. The result multiplied by 100 is a percentage that represents its funded debt ratio. Based on certain parameters such as the industry in which a company operates, the criteria for a healthy ratio 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 dependence on debt to fund a company’s long-term operations, and that could restrict future growth and lead to shareholder disapproval. While some debt on a balance sheet might be necessary, too much of it could be especially damaging during challenging economic times, because the company is obligated to make interest payments to its creditors. It also could limit a company’s access to more lending at favorable rates.
There are various types of indebtedness, including long-term debt, short-term debt and operational liabilities, all of which are categorized separately on a company’s balance sheet. When addressing a company’s debt, these loan obligations might be characterized in one of several ways by financial analysts. 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 to debt refers only to a company’s funded debt. A more moderate opinion addresses both long- and short-term obligations. Analysts who take a conservative view of a company’s debt consider its long-term and short-term obligations, in addition to deferred taxes and forthcoming retirement benefits to employees.