Effective Debt

Effective debt refers to the sum of all of a company's outstanding debt. In addition to standard debt issues, this figure also includes any regular payments that the company is regularly making, such as lease payments. The purpose of the effective debt measurement is to determine what portion of the company's revenue is devoted to debt service and other payments and how this might affect the company's profitability. When effective debt rises above a certain level it is likely the company's profitability or even its ability remain viable will suffer.

The effective debt metric gives investors a more accurate measure of a company's overall debt load. Companies operating in certain sectors that are usually debt heavy due to large overhead costs, such as real estate and brick and mortar retail, can have a good portion of their liabilities tied up in real estate leases and payments. When examining financial statements, a company's effective debt load should be examined in conjunction with a thorough cash flow analysis and also take into account the norms of a particular industry.