Companies publish balance sheets with details of their operations. This is the best place to know about a company’s debts.
A few metrics that can help:
Debt ratio: Take the company’s total assets and divide it by its liabilities. This is the debt ratio. Debt isn’t uncommon or a negative trait by itself. But companies with a high debt ratio run the risk of defaulting.
Debt-to-equity ratio: this metric tells us how much shareholders' money vs borrowed money is being used to run a company’s operations.
Look at the company's financial statements: The company's financial statements, specifically the balance sheet, will list the company's liabilities, which includes its debt.
Identify the types of debt: There are several types of debt that a company may have, such as loans, bonds, and leases. Make sure to identify and consider all types of debt.
Calculate the total debt: Add up all the amounts listed under liabilities on the balance sheet to arrive at the company's total debt.
Consider off-balance sheet debt: Some companies may have off-balance sheet debt, which does not appear on the balance sheet. This could include things like operating leases or unfunded pension obligations. You may need to consult the company's footnotes to the financial statements or do additional research to find this information.
Use financial ratios: You can also use financial ratios, such as debt-to-equity ratio, to get a sense of how much debt a company has relative to its equity.
Use financial databases: There are several financial databases that provide information on companies' financials, including their debt. For example, you can use Bloomberg, Capital IQ, or Yahoo Finance to search for a company and access their debt-related information.
Check the company's credit rating: Credit rating agencies, such as Moody's, Standard & Poor's, and Fitch Ratings, provide credit ratings for companies based on their ability to repay their debt. Checking a company's credit rating can give you an idea of how much debt the company has and its creditworthiness.
Look at the company's annual report: The annual report of a company may contain information about its debt levels, its debt maturity profile, and its debt covenants.
Use online financial resources: There are several online financial resources that can provide information on a company's debt, such as debt-to-equity ratio, debt-to-assets ratio, and interest coverage ratio. Examples of such resources include Investopedia, MarketWatch, and Seeking Alpha.
There are a few other ways of measuring debt of a company.
The reality of debt is, there is never a clear ‘right’ or ‘wrong’. In different industries, different levels of debt are acceptable.
Some industries cannot survive without taking debt.
Even the best of companies have debt on their sheets.
An investor needs to study individual companies and the industries they belong to, to understand what levels of debt are good and what are bad.
