What is financed debt?

Funded debt represents the amount of long-term debt a company has on its balance sheet. Refers to bonds or other debt instruments maturing in more than one calendar year or fiscal year. Unfunded debt is the alternative to funded debt and represents loans maturing in less than one year. A debtor is required to make interest payments on the debt to his creditors during the term 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 borrow in the future.

Long-term debt can be measured in several ways, one of which is an index that compares financed debt to capitalization or financial structure. This is a measure of a company's long-term obligations compared to equity. To measure a company's capitalization ratio, long-term debt is divided by the sum of long-term debt and equity. The result is multiplied by 100 to obtain a percentage representing the share of a company's total financial structure due to indebtedness.

A company's financed debt/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 financed indebtedness ratio. Depending on some parameters, such as the sector in which the company operates, the criteria for a healthy relationship vary. A low percentage represents a stable balance and presents options for how to apply future capital.

A high level of financed debt compared to equity demonstrates a dependence on debt to finance a company's long-term operations, and this can constrain future growth and lead to shareholder disapproval. While some debt may be required on the balance sheet, too much can be especially harmful during difficult 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 approaching a company's debt, these financial analysts can characterize these credit obligations in a variety of ways. It is the job of analysts to research, analyze and evaluate companies based on criteria that include debt and equity.

An analyst who takes a liberal view of debt is only referring to a company's financed debt. A more moderate view deals with both long-term and short-term obligations. Analysts who take a conservative view of a company's debt consider its long-term and short-term obligations, as well as deferred tax and future employee retirement benefits.

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