# debt ratios (Schweser notes book3, page 278)

debt to capital = total debt / (total debt + total shareholders’ equity) capital = all long-term debt plus preferred stock and equity Question 1: if so, why the denominator uses total debt rather than total long-term debt? ******************************** debt to assets = total debt / total assets on page 279, it says total capital = total assets Question 2: what the hell is total capital? why on page 278 it’s long-term debt + equity, but on page 279 it equals total assets? ******************************** Question 3: what the hell is the difference between debt to assets and debt to capital? Many thanks.

I’m not using the Schweser reading material, but it sounds like the authors got a little sloppy with the terminology. Have you checked to the errata?

I believe they are looking at it from the two sides of the A=L+E equation Look at it two ways: Total Capital = A on the A = L + E equation. Also Total Capital = L + E = Long Term Debt + Equity. (assuming Short term debt is in the Current Liabilities).

Portfolio, you really have to look at the context. there are a couple of interesting discussions, they don’t answer your question by you might find them helpful: http://www.analystforum.com/phorums/read.php?11,531711,531711#msg-531711 http://www.analystforum.com/phorums/read.php?11,618668,619014#msg-619014

thanks maratikus, the chains of discussion are informative, but they’re answering a different question why interest expenses are added back to the return ratios (or profitability ratios). My question is the difference between total capital and total assets in solvency ratios (debt to capital and debt to assets).

There is a difference. Total assets is the sum of total liabilities and total equity. Total capital is the sum of total long term debt and long term equity financing. The two are not the same. Assets can be financed by trade payables, unearned revenues, and so on–noncurrent accounts. Those accounts are not part of total capital, however. Same goes for deferred tax liabilities. Do you have the CFAi materials? If so, I would use volume 3 as the reference point. There really shouldn’t be any wiggle room when it comes to defining these terms.

gdiddy, thanks

I agree with gdiddy. in CFAi book3, P595, exhibit 11, note b, total debt=interest-bearing short-term and long-term debt so total capital not include trade payable, wage payable, DTL, etc. the statement in Schweser notes book3, page 279, total capital =total assets is not accurate. and in Schweser notes book3, page 281, the paragraph after the fomula Return On Total Capital=EBIT/ average total capital, it says again, " total capital is the same as total assets." it seems wrong too. I will check with Schweser on-line professor chating, and post result here next Monday.

here’s the explanation from Schweser. we should follow curriculum in the exam: total invested capital = interest-bearing short-term and long-term debt plus equity --------------------------------------------------------------------------- Total debt and total capital can be calculated in different ways by different analysts, or for different uses. In various contexts it might make sense to include all liabilities, only interest-bearing liabilities, only long-term liabilities, et cetera. In the curriculum, there is a footnote that says, “In this reading, we take total debt in this context to be the sum of interest-bearing short-term and long-term debt.” If we go with that when we determine total capital, then what we’re really talking about is total invested capital – interest-bearing short-term and long-term debt plus equity