Market Overview

Phillips 66's Debt Overview

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Shares of Phillips 66 Inc. (NYSE: PSX) moved higher by 2.93% in the past three months. Before we understand the importance of debt, let's look at how much debt Phillips 66 has.

Phillips 66's Debt

Based on Phillips 66’s balance sheet as of May 1, 2020, long-term debt is at $10.72 billion and current debt is at $2.24 billion, amounting to $12.96 billion in total debt. Adjusted for $1.22 billion in cash-equivalents, the company's net debt is at $11.74 billion.

Shareholders look at the debt-ratio to understand how much financial leverage a company has. Phillips 66 has $53.46 billion in total assets, therefore making the debt-ratio 0.24. Generally speaking, a debt-ratio more than 1 means that a large portion of debt is funded by assets. As the debt-ratio increases, so the does the risk of defaulting on loans, if interest rates were to increase. Different industries have different thresholds of tolerance for debt-ratios. A debt ratio of 40% might be higher for one industry, whereas average for another.

Why Shareholders Look At Debt?

Debt is an important factor in the capital structure of a company, and can help it attain growth. Debt usually has a relatively lower financing cost than equity, which makes it an attractive option for executives.

However, interest-payment obligations can have an adverse impact on the cash-flow of the company. Having financial leverage also allows companies to use additional capital for business operations, allowing equity owners to retain excess profit, generated by the debt capital.

 

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