Debt/total cap for a fund's underlying stock holdings is calculated by dividing each security's long-term debt by its total capitalization (the sum of common equity plus preferred equity and long-term debt) and is a measure of the company's financial leverage. All else being equal, stocks with high debt/total cap ratios are generally riskier than those with low debt/total cap ratios. Note that debt/total cap figures can be misleading owing to accounting conventions. Because balance sheets are based on historic cost accounting, they may bear little resemblance to current market values. Morningstar aggregates debt/total cap figures for mutual funds using a median methodology, whereby domestic stocks are ordered from highest to lowest based on their debt/total cap ratios. One adds up the asset weighting of each holding until the total is equal to or greater than half of the total weighting of all domestic stocks in the fund. The debt/total cap for that stock is then used to represent the debt/total cap of the total portfolio.
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