The Amount of Debt in the Long-Term Capital Structure

Watch the video with Andrew Stotz on the amount of debt in the long-term capital structure when forecasting a company or read a summary below.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

The amount of debt in the long-term capital structure

The Amount of #Debt in the Long-Term #Capital Structure by @Andrew_Stotz

How much debt will a company carry in the long-term?

This discussion starts by accumulating the financial statements of the 500 largest and most liquid non-financial companies in Asia.

Warren Buffett’s 2018 Activist Investment

Berkshire Hathaway Warren BuffettMost investors are aware of Warren Buffett's most high profile long-term investments. However, there is one long term investment that is often overlooked. Q2 2020 hedge fund letters, conferences and more This is building materials maker USG, which was owned by Berkshire Hathaway for more than 17 years before it was acquired in 2018. If Read More

The Amount of #Debt in the Long-Term #Capital Structure by @Andrew_Stotz

What would happen to the WACC if debt was 30%, 40%, 50%, or 60% of total capital?

The Amount of #Debt in the Long-Term #Capital Structure by @Andrew_Stotz


Debt component of capital fluctuates based on the market value of equity

Assume that the debt level of a company remains the same throughout the stock market’s ups and downs. Also, assume that the book value of equity is the same over the same period. The only thing that will change is the price-to-book ratio. When it is low the market is pessimistic, when it is high the market is optimistic.

The Amount of #Debt in the Long-Term #Capital Structure by @Andrew_Stotz

If the value of equity of a company is trading at a low 0.5x price-to-book value then the debt will appear as a large portion of capital. If the value of equity is trading at an expensive 4.0x then debt appears tiny. But debt never changed.

Forecast long-term debt between 0% and 50%

  • When forecasting the long-term portion of debt as a % of total capital consider a range from 0% to 50%
  • If you estimate over 50% you are saying that from now to infinity the lenders to the company will put in more capital than the equity holders, this is unlikely
  • In addition, such a forecast will cause your WACC to be very small, producing a high valuation of the stock
  • Also, be aware of the price-to-book value of the company’s stocks
  • If it is trading at a very high 4x multiple the debt level may appear small
  • This would produce a higher than realistic WACC, hence a lower than realistic value for the stock
  • A price-to-book value of about 2x might be more realistic

Want to become a valuation master? Click here to learn more

DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.

Previous articleApple And The iPhone 8 Dilemma
Next articleMost Googled Car In Every U.S. State
Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company providing institutional investors with ready-to- invest portfolios in Asia that aim to beat the benchmark through superior stock selection. The company also provides buy- and sell-side clients with financial models to value any company in the world and World Class Benchmarking to determine what companies are financially world class. Previously, as Head of Research at CLSA, Andrew was voted No. 1 Analyst in Thailand in the Asiamoney Brokers Polls for 2008 and 2009. He was also voted No. 1 Analyst in Thailand in the 2009 Institutional Investor magazine All-Asia Research Team Report. Andrew earned his PhD in finance at the University of Science and Technology of China in Anhui province, with a focus on answering questions raised by fund managers and analysts during his career about picking stocks and managing portfolios. In addition, Andrew has been a lecturer in finance for 22 years at various universities in Thailand. Since 2013, he has been the president of the CFA Society of Thailand. He is also the author of How to Start Building Your Wealth Investing in the Stock Market.