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Author: TMFGump Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2201  
Subject: Re: Long-Term Debt to Equity calc? Date: 4/26/1999 4:40 PM
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Hey tjrc,

Long-term Debt/equity and long-term debt/market capitalization are two different numbers.

Long-term Debt/Equity is calculated by dividing long-term debt by shareholders equity, as listed on the balance sheet. (In IBM's case, $15.5 billion long term debt/$19.4 billion shareholders equity: 0.80.) Shareholders equity tends to be fairly stable and represents the equity capital invested in the business.

Long-term Debt/Market Cap is the calculated by dividing long-term debt by market capitalization (number of shares outstanding * stock price). For IBM, this calculation would be $15.5 billion long-term debt/$193 billion market capitalization: 0.08. Market capitalization represents the equity value of the company at current market prices. The biggest drawback to using it to calculating ratios is its volatility... one week ago, IBM had a market cap of $153.5 billion, 20% less than today.

In either case, I would encourage you to calculate the figure as debt/equity and debt/market cap instead of long term debt/equity and long term debt/market cap. To do that calculation, you need to add up both short and long term debt and divide by the appropriate denomenator. Such an exercise is particularly worthwhile for IBM, which has $13.9 billion in short-term debt. (Should a debt be considered something else because it is due within twelve months?)

Fool on,

Warren

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