Read more on "What is debt?"
averages for debt ratios
debt in the cost of capital is the debt used to fund the operations
and investments of the firm. Using this rationale, it should include
all interest bearing debt, short term as well as long term. Non-interest
bearing liabilities such as accounts payable, supplier credit and
accrued items should be incorporated into working capital and should
not be counted as debt.
To the extent that firms fund their operations
with off-balance sheet debt, you should try to incorporate these
borrowings as well into debt. While this may be difficult to do
when firms are deceitful, you can, at the minimum, bring the present
value of operating lease commitments into your debt.
One final comment, Analysts are often
tempted to include more items in debt, assuming that this is the
conservative thing to do. In reality, defining debt much more broadly
will increase the debt ratio and reduce the cost of capital. This,
in turn, will increase value and not decrease it.