long-term debt question

Is there any way to tell from a company’s financial statements how much of its long term debt is in bonds and how much is in bank loans? And what about convertible bonds, which have the potential to dilute shares? Are there any factors in P123 that can help? I’ve been reading Graham and Dodd’s chapter on capitalization structure and wondering if I can investigate anything in it using P123, or whether a company’s bond issuance is basically outside P123’s scope.

It’s basically outside our scope. The breakdown of bond debt to bank debt isn’t usually reported, as I recall. I mean, you can sometimes piece it together, especially if you have access to something like Bloomberg or Reuters and can see all of the issues on one screen. (Or, y’know, you have the SEC docs and an intern to comb through them. Presumably one you don’t like very much.)

Also, from an external analyst perspective, it’s not the type of debt that’s a big deal, it’s the payment schedule. We don’t care if the company is in danger of going bankrupt to a bank or to bond holders, we care about whether they’re able to meet their debt obligations.

The dilutive effect of bond attachments is included in the basic v. fully diluted share count, and also isn’t broken out.

With Paul’s thought in mind, I use a simple buy/sell rule for this:
OpIncTTM > IntExpTTM (buy)
(I also use debt factors/formula in my ranking systems.)
I like to own stocks that, from an operating standpoint, can pay their immediate interest expenses. (I sell if they cannot do this for the last four quarters.) I added this rule over the last couple of years as more and more companies took on increasing debt. I think this could be important moving forward.

I am taking a finance class right now where the instructor is talking about optimizing a company’s WACC by re-balancing debt and equity as the company’s business and operating environment changes.
From an academic standpoint, I can see where changing your capital structure to optimize for the lowest WACC makes sense. It has (theoretically) a direct impact on your present value of cash flows. And potentially positively impacting the stock price.
But from a conservative investors standpoint, I always get nervous when I see a company taking on more and more debt. Piotroski seems to agree because one of his tests looks for lower debt (year to year). And Buffet does not like a lot of long term debt either.
Debt is something to be handled gingerly, IMHO. Especially for smaller, more fragile companies with inconsistent cash flows.

If you’re going to go there, we have a pre-calculated debt service to net income ratio (DbtS2NITTM). Personally, were I to use it, I’d use the inverse. Debt service is always going to be NA, zero, or positive (which would make some things easier to deal with), and the meaning is more easily expressed in English: The number of times that net income would cover the debt service.

Thanks to Paul and David for clarifying capitalization structure here.

I agree with you about debt and income. I flip the debt to income ratio and use this as one of my ranking formulae: OpIncBDeprTTM / Max (0.05, DbtTotQ). It’s pretty much the same ratio that banks and rating agencies use, and they should know. That said, I’ve always invested in a number of companies with negative operating income, so I’m not going to use a hard-and-fast rule like OpIncTTM > IntExpTTM. And there are lots of other good ways to take debt into account without referring to income, including balance sheet ratios and EV-based ratios.

The closest thing to bank notes payable in P123’s data is “DbtST”. The closest thing in Compustat’s data is Notes Payable (NP), which is only available on an annual basis and more sparsely populated than DbtST.

This is the top-down view on debt from Compustat’s data guide:

Debt - Total: DT (P123: DbtTot)
This concept is the sum of Total Long-Term Debt, which is defined as debt obligations due more than one year from the company’s balance sheet date, plus Debt in Current Liabilities, which is defined as the total amount of short-term notes and the current portion of long-term debt (debt due in one year).
Concept Calculation: DLTT+DLC

Debt in Current Liabilities: DLC (P123: DbtST)
This item represents the total amount of short-term notes and the current portion of long-term debt, which is also stated as Notes Payable (NP) + Debt Due in 1st Year (DD1).
This item includes:

  1. Bank acceptances and overdrafts
  2. Loans payable to the officers of the company
  3. Loans payable to stockholders
  4. Loans payable to parents, and consolidated and unconsolidated subsidiaries
  5. Notes payable to banks and others
  6. Installments on a loan

Debt Due in 1st Year: DD1 (P123: N/A)
This item represents the current portion of long-term debt (included in Current Liabilities).
(Not available as quarterly item)

Notes Payable: NP (P123: N/A)
This item represents the total amount of short-term notes.
This item includes…
6. Notes payable - banks, others
This item excludes

  1. Current portion of long-term notes payable (included in Debt Due In One Year)
  2. Due to factor (included in Current Liabilities - Other)
    (Not available as quarterly item)

Long-Term Debt - Total: DLTT (P123: DbtLT)
The item represents debt obligations due more than one year from the company’s balance sheet date.
This item includes…
3. Long-term lease obligations (capitalized lease obligations)

9. All obligations that require interest payments