I need help calculating Debt Equity Ratio. I am looking at Walmart 2015's Year End Balance sheet Here:.

Debt Equity Ratio is Total Debt / Total Equity.

My trouble is in finding Total Debt. It shows 45,938.00 as 'Total Debt' on that statement- however, Total debt *should* be Total Current Liabilities + Total Long Term + Other Liabilities, yes? If so, according to that statement, it should be 66,928.00 + 36,015.00 + 6,003.00 ?

Why does this not match?

TIA

Casey TableTennis said:

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Not all current liabilities are "debt".

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Yes and no. Technically all liabilities are obligations to pay someone, which is debt.

Debt as it relates to debt to equity ratio focuses on actual, non-working capital debt.

It's a rationused to determine how much skin is in the game vs the leveraged amount of debt.

Also used to determine liquidity of a seller/owner.

Leverage can be manipulated, more so than the working capital of the company.

If you're looking at the liquidity of the company the current ratio would be the better indicator. The liquidation value would be SHE +/- fair market value of items.

Correct - I was meaning under a normal working capital situation. Obviously some companies overbuy inventory or stretch payables or have bad AR or keep a ton of cash on the books, etc.

FriendlyAg said:

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Casey TableTennis said:

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Not all current liabilities are "debt".

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Yes and no. Technically all liabilities are obligations to pay someone, which is debt.

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What about deferred revenue? How about billings in excess of costs in relation to long term contracts?

george92 said:

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FriendlyAg said:

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Casey TableTennis said:

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Not all current liabilities are "debt".

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Yes and no. Technically all liabilities are obligations to pay someone, which is debt.

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What about deferred revenue? How about billings in excess of costs in relation to long term contracts?

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Those are still liabilities. You're still liable to preform the work in order to receive revenue which costs assets sometimes in order to complete. If I have 5 dollars In cash and I owe you work that will cost me 3 dollars to complete so I can recognize my revenue of 5 dollars that I accepted a month ago, don't you think that should be factored in as debt? It directly effects your equity.

There is a whole lot of "it depends". Financial statement analysis depends largely on the industry you're looking at when you want to pull apart and compare ratios. You also have to compare to Like size companies in the same industry.

Having not even looked at Walmart's financials, I'm not sure what a pure long term debt over equity ratio would tell you. They probably own a lot of land, buildings, and FFE. But they also have a ton of current liabilities as well as other obligations like any large company would.

Mainly because their financials are probably going to be much more complex than just long term debt and a single line of credit for working capital.

What's healthy for them? Who's their benchmark? They largely are the benchmark so you'd have to find several other large retailers and compare their numbers and think about how their strategies differ.

After you look at their total liabilities over total equity, debt/equity, then you should look at their ability to create cash flow to service their debts. They can temporarily be caught at a point in time where they appear over leveraged but they have ample cash flow to reduce that. You also want to look at their working capital history.

In many ways you have to understand they all companies have different personalities running them. Some run with higher risk than others and some are painfully conservative. You need to be able to form a story from the numbers that you're able to understand that if push comes to shove, what would happen and how strong are they?

Casey TableTennis said:

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In the context of this financial statement presentation it isn't.

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That's dumb. I just opened it. When you owe vendors $44Bn, I consider that a debt. You know Walmart stretchs their days too. They probably pay on 180-210 terms if I had to guess, but they make everyone else pay them in a few weeks.

The point of using bank debt (rather than all liabilities) is that leverage is a capital structure model, not an operating model.

You could run a company with $5 of equity, I can run it with $1 equity and $4 of debt. Understanding that ratio helps put companies on comparable terms. Much the same reason investors utilize EBITDA as a metric rather than net income or operating income/EBIT.

If you end goal is to see liquidity and cash flow to cover liabilities there are better ways to assess that health.

Old Buffalo said:

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The point of using bank debt (rather than all liabilities) is that leverage is a capital structure model, not an operating model.

You could run a company with $5 of equity, I can run it with $1 equity and $4 of debt. Understanding that ratio helps put companies on comparable terms. Much the same reason investors utilize EBITDA as a metric rather than net income or operating income/EBIT.

If you end goal is to see liquidity and cash flow to cover liabilities there are better ways to assess that health.

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All liabilities are leverage, they don't have to be from a bank. Disagree that it puts it on comparable terms with all companies. Leverage for manufactures, developers, and banks are all wildly different and doesn't mean one is unhealthy just because another industry's "norm" is different.

[gross margin/operating margin/cash flow/working calital] for manufactures, developers, and banks are all wildly different and doesn't mean one is unhealthy just because another industry's "norm" is different.

Old Buffalo said:

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[gross margin/operating margin/cash flow/working calital] for manufactures, developers, and banks are all wildly different and doesn't mean one is unhealthy just because another industry's "norm" is different.

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So you are saying that any leverage ratio can be seen as apples to apples for any industry with any size business?

That's so wrong it hurts. Same reason it's misleading to simply look at bank debt over equity. What does that even really tell you? It's arbitrary. They could be way over-leveraged and you wouldn't even know it because you are dismissing liabilities to other creditors besides banks.

http://www.investopedia.com/articles/investing/083115/why-do-debt-equity-ratios-vary-industry-industry.asp

Are you a business owner?

FriendlyAg said:

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Casey TableTennis said:

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In the context of this financial statement presentation it isn't.

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That's dumb. I just opened it. When you owe vendors $44Bn, I consider that a debt. You know Walmart stretchs their days too. They probably pay on 180-210 terms if I had to guess, but they make everyone else pay them in a few weeks.

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Their payment terms likely aren't that bad. Their DPO is 40.x, and their DIO is 44.x. That's not indicative of a vendor squeeze.

You are correct. I hadn't looked at the numbers. I promise you they are squeezing the smaller vendors. Their larger suppliers that have weight to throw around are helping to keep that average down.

The 12 month average for APDOH is 42 days and their ARDOH is 4. That is financing even on a short term basis.

FriendlyAg said:

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You are correct. I hadn't looked at the numbers. I promise you they are squeezing the smaller vendors. Their larger suppliers that have weight to throw around are helping to keep that average down.

The 12 month average for APDOH is 42 days and their ARDOH is 4. That is financing even on a short term basis.

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That's the ideal model for a retailer. Take delivery of inventory and sell it before you pay for it. Your vendors finance your business. Trade financing =/= debt, however.

jh0400 said:

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FriendlyAg said:

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You are correct. I hadn't looked at the numbers. I promise you they are squeezing the smaller vendors. Their larger suppliers that have weight to throw around are helping to keep that average down.

The 12 month average for APDOH is 42 days and their ARDOH is 4. That is financing even on a short term basis.

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That's the ideal model for a retailer. Take delivery of inventory and sell it before you pay for it. Your vendors finance your business. Trade financing =/= debt, however.

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The whole point of a debt to equity ratio is to look at how much of the company's equity financed their assets versus other people's money. Financing is debt. Trade financing is still financing where the company has more assets because of a liability instead of equity.

SHE already incorporates other liabilities.

Assets = CL + Debt + SHE. That's why I referenced debt/equity being a capital model, not an operating model.

Old Buffalo said:

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SHE already incorporates other liabilities.

Assets = CL + Debt + SHE. That's why I referenced debt/equity being a capital model, not an operating model.

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Equity also has debt taken out of it hah, it also has current liabilities taken out of it. Debt, CL, and other liabilities equal total liabilities. Total liabitlies plus equity equals assets.

You can also do it this way... equity minus assets over equity. That's how much you owe to anyone/everyone over what you own.