A company's debt, liabilities and risk are very important factors in understanding the company. Having an understanding of a company's debt and liabilities is a key component in understanding the risk of a company, thus aiding in the decision to invest, not to invest, or to stay invested in a company. There are many metrics involved in understanding the debt of a company, but for this article, I will look at **Halliburton Company's** (NYSE:HAL) total debt, total liabilities, debt ratios and WACC.

Through the above-mentioned four main metrics, we will understand more about the company's debt, liabilities and risk. If this summary is compared with other companies in the same sector, you will be able see which has the most debt and the most risk.

All material is sourced from Google Finance, Morningstar and the company webpage.

*1. Total Debt = Long-Term Debt + Short-Term Debt*

Debt is an amount of money borrowed by one party from another, and must be paid back. Total debt is the sum of long-term debt, which is debt that is due in one year or more, and short-term debt, which is any debt that is due within one year.

- 2007 - $2.627 billion + $159 million = $2.786 billion
- 2008 - $2.586 billion + $26 million = $2.612 billion
- 2009 - $3.824 billion + $750 million = $4.574 billion
- 2010 - $3.824 billion + $0 million = $3.824 billion
- 2011 - $4.820 billion + $0 billion = $4.820 billion

Halliburton's total debt has been increasing over the past five years. In 2007, Halliburton reported a total debt of $2.786 billion. In 2011, the company reported a total debt of $4.820 billion. Over the past 5 years, Halliburton's total debt has increased by 73.0%.

*2. Total Liabilities*

Liabilities are a company's legal debts or obligations that arise during the course of business operations, so debts are one type of liability, but not all liabilities. Total liabilities is the combination of long-term liabilities, which are the liabilities that are due in one year or more, and short-term or current liabilities, which are any liabilities due within one year.

- 2007 - $6.269 billion
- 2008 - $6.660 billion
- 2009 - $7.810 billion
- 2010 - $7.924 billion
- 2011 - $10.479 billion

Halliburton's liabilities have been increasing over the past 5 years. In 2007, the company reported liabilities at $6.269 billion; in 2011, the company reported liabilities at $10.479 billion. This is an increase of 67.16%.

In analyzing Halliburton's total debt and liabilities, we can see that the company currently has a total debt of $4.820 billion and liabilities at $10.479 billion. Over the past five years, the total debt has increased by 73.0%, while total liabilities have increased by 67.16%. As the company's amount of debt and amount of liabilities have been increasing over the past 5 years, the next step will reveal if the company has the ability to pay them.

**Debt Ratios**

*3. Total Debt to Total Assets Ratio = Total Debt / Total Assets*

This is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company's total assets.

A debt ratio of greater than 1 indicates that a company has more total debt than assets; meanwhile, a debt ratio of less than 1 indicates that a company has more assets than total debt. Used along with other measures of financial health, the total- debt-to-total-assets ratio can help investors determine a company's level of risk.

- 2009 - $4.574 billion / $16.538 billion = 0.28
- 2010 - $3.824 billion / $18.297 billion = 0.21
- 2011 - $4.820 billion / $23.677 billion = 0.20

As Halliburton's total-debt-to-total-assets ratio has been decreasing over the past 3 years. This indicates that the company has been adding more assets than total debt. This is a positive signal if the company is making money on those assets. As the number is currently below 1 and decreasing, this states that the risk to the company regarding its debt to assets has been decreasing over the past three years.

*4. Debt ratio = Total Liabilities / Total Assets*

Total liabilities divided by total assets. The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged." A company with a high debt ratio or that is "highly leveraged" could be in danger if creditors start to demand repayment of debt.

- 2009 - $7.810 billion / $16.538 billion = 0.47
- 2010 - $7.924 billion / $18.297 billion = 0.43
- 2011 - $10.479 billion / $23.677 billion = 0.44

In looking at Halliburton's total liabilities to total assets ratio, we can see that the ratio has decreased slightly over the past three years. As these numbers are below the 0.50 mark, this indicates that Halliburton has not financed most of the company's assets through debt, but though its equity. This indicates a good level of financial health for the company.

*5. Debt to Equity Ratio = Total Liabilities / Shareholders' Equity*

The debt-to-equity ratio is another leverage ratio that compares a company's total liabilities with its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.

A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.

- 2009 - $7.810 billion / $8.728 billion = 0.89
- 2010 - $7.924 billion / $10.373 billion = 0.76
- 2011 - $10.479 billion / $13.198 billion = 0.79

Over the past three years, Halliburton's debt-to-equity ratio has bounced around from a low of 0.76 to a high of 0.89. As the ratio is below 1, this indicates that shareholders have more equity invested than suppliers, lenders, creditors and obligators. 0.79 indicates a moderately low amount of risk for the company. As the ratio is below 1 and considered moderately low, so is the risk for the company.

*6. Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity*

(LT Debt = Long-Term Debt)

The capitalization ratio tells the investors about the extent to which the company is using its equity to support its operations and growth. This ratio helps in the assessment of risk. Companies with a high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.

- 2009 - $3.824 billion / $12.552 billion = 0.30
- 2010 - $3.824 billion / $14.197 billion = 0.27
- 2011 - $4.820 billion / $18.018 billion = 0.27

Over the past three years, Halliburton's capitalization ratio has decreased from 0.30 to 0.27. This implies that the company has had slightly more equity compared with its long-term debt. As this is the case, the company has had more equity to support its operations and add growth through its equity. As the ratio is decreasing and still very low financially, this implies a low amount of risk to the company.

*7. Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt*

This coverage ratio compares a company's operating cash flow with its total debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt. The larger the ratio, the better a company can weather rough economic conditions.

- 2009 - $2.406 billion / $4.574 billion = 0.53
- 2010 - $2.212 billion / $3.824 billion = 0.58
- 2011 - $3.684 billion / $4.820 billion = 0.76

Over the past three years, the cash flow to total debt ratio has been increasing. Like many of the ratios listed above, this indicates a strengthening of the company. Even though the ratio is increasing, the ratio is still below 1. As the ratio is below 1, this implies that the company does not have the ability to cover its total debt with its yearly cash flow from operations.

Based on the five debt ratios listed above, we can see that Halliburton's ratios have strengthened over the past 3 years. Even though the debt and liabilities have increased, the ratios indicate that the company's growth has been stronger than the increase in debt and liabilities. As this is the case, the ratios indicate a decreasing amount of financial risk to the company over the last 3 years. The next step will reveal how much the company will pay for the debt incurred.

**Cost of Debt**

The cost of debt is the effective rate that a company pays on its total debt.

As a company acquires debt through various bonds, loans and other forms of debt, the cost of debt metric is useful, because it gives an idea as to the overall rate being paid by the company to use debt financing.

This measure is also useful because it gives investors an idea as to the riskiness of the company compared with others. The higher the cost of debt the higher the risk.

*8. Cost of debt (before tax) = Corporate Bond rate of company's bond rating.*

- S&P rated Halliburton Company's bonds "A"
- Current 20-year corporate bond Rate of "A" = 3.87%
- Current cost of Debt as of October 14th 2012 = 3.87%

According to the S&P rating guide, the "A" rating is - "Strong capacity to meet financial commitments but somewhat susceptible to adverse economic conditions and changes in circumstances." Halliburton Company has a rating that meets this description.

*9. Current tax rate (Income Tax total / Income before Tax)*

- 2007 - $907 million / $3.460 billion = 26.21%
- 2008 - $1.211 billion / $3.163 billion = 38.28%
- 2009 - $518 million / $1.682 billion = 30.80%
- 2010 - $853 million / $2.655 billion = 32.13%
- 2011 - $1.439 billion / $4.449 billion = 32.34%

5-year average = 31.95%

Over the past five years, Halliburton Company has averaged a tax rate of 31.95%.

*10. Cost of Debt (After Tax) = (Cost of debt before tax) (1 - tax rate)*

The effective rate that a company pays on its current debt after tax.

- .0387 x (1 - .3195) = Cost of debt after tax

The cost of debt after tax for Halliburton Company is *2.63%*

**Cost of equity or R equity =** Risk free rate + Beta equity (Average market return - Risk free rate)

The cost of equity is the return a firm theoretically pays to its equity investors, for example, shareholders, to compensate for the risk they undertake by investing in their company.

- Risk free rate = U.S. 10-year bond = 1.66% (Bloomberg)
- Average market return 1950 - 2011 = 7%
- Beta = (Google Finance) Halliburton's beta = 1.55

Risk free rate + Beta equity (Average market return - Risk free rate)

- 1.66 + 1.55 (7-1.66)
- 1.66 + 1.55 x 5.34
- 1.66 + 8.27 = 9.93%

Halliburton has a cost of equity or R Equity of 9.93%, so investors should expect to get a return of 9.93% per-year average over the long term on their investment to compensate for the risk they undertake by investing in this company.

(*Please note that this is the CAPM approach to finding the cost of equity. Inherently, there are some flaws with this approach and that the numbers are very "general." This approach is based off of the S&P average return from 1950 - 2011 at 7%, the U.S. 10-year bond for the risk free rate which is susceptible to daily change and Google finance beta.*)

**Weighted Average Cost of Capital or WACC**

The WACC calculation is a calculation of a company's cost of capital in which each category of capital is equally weighted. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation.

As the WACC of a firm increases, and the beta and rate of return on equity increases, this states a decrease in valuation and a higher risk.

By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances.

For this calculation, you will need to know the following listed below:

Tax Rate = 31.95% (Halliburton Company's five-year average Tax Rate)

Cost of Debt (before tax) or **R debt** = 3.87%

Cost of Equity or **R equity** = 9.93%

Debt (Total Liabilities) for 2011 or **D** = $10.479 billion

Stock Price = $33.80 (October 15th, 2012)

Outstanding Shares = 927.75 million

Equity = Stock price x Outstanding Shares or **E** = $31.357 billion

Debt + Equity or **D+E** = $41.836 billion

**WACC** = R = (1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)

(1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)

(1 - .3195) x .0387 x ($10.479/$41.836) + .0993 ($31.357/$41.836)

.6805 x .0387 x .2505 + .0993 x .7495

.0066 + .0744

= 8.10%

Based on the calculations above, we can conclude that Halliburton Company pays 8.10% on every dollar that it finances, or 8.10 cents on every dollar. From this calculation, we understand that on every dollar the company spends on an investment, the company must make $.0810 plus the cost of the investment for the investment to be feasible for the company.

**Summary**

In analyzing Halliburton Company's total debt and liabilities, we can see that the company currently has a total debt of $4.820 billion and liabilities at $10.479 billion. Over the past five years, the total debt has increased by 73.0%, while total liabilities have increased by 67.16%. The company's amount of debt and amount of liabilities have been increasing over the past 5 years.

Based on the five debt ratios listed above, we can see that Halliburton's ratios have strengthened over the past 3 years. Even though the debt and liabilities have increased, the ratios indicate that the company's growth has been stronger than the increase in debt and liabilities. As this is the case, the ratios indicate a decreasing amount of financial risk to the company over the last 3 years.

As Halliburton Company's bond rating currently stands at "A" this indicates that the company has a "Strong capacity to meet financial commitments but somewhat susceptible to adverse economic conditions and changes in circumstances."

The CAPM approach for cost of equity states that shareholders need 9.93% average per year over a long period of time on their equity to make it worthwhile to invest in the company. This calculation is so based on the average market return between 1950 and 2011 at 7%.

The WACC calculation reveals that the company pays 8.10% on every dollar that it finances. As the current WACC of Halliburton Company is currently 8.10% and the beta is above average at 1.55, this implies that the company needs at least 8.10% on future investments and will have above average volatility moving forward.

Based on the calculations above, the company has increased its debt and liabilities but currently has the capacity to make its debt payments and meet its tax obligations.

The analysis of Halliburton Company's debt and liabilities indicates a very strong company with increasing debt and liabilities. The analysis also reveals that the company growth rate is increasing faster than the company's debt and liabilities. Over the past 3 years, this has decreased the financial risk to the shareholder. The Bond rating of "A" by S&P indicates that a company has a "Strong capacity to meet financial commitments but somewhat susceptible to adverse economic conditions and changes in circumstances." The WACC reveals that Halliburton has the ability to add future investments and assets at relatively low rates. Currently, Halliburton Company has the ability to pay for its debts meet its obligations while adding growth.

All indications above reveal a company with strong investment potential long term for the shareholder, as long as the above ratios maintain or improve on their current standards.

**Disclosure: **I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.