Shares of Union Pacific Inc. UNP moved higher by 10.31% in the past three months. Before we understand the importance of debt, let's look at how much debt Union Pacific has.
Union Pacific's Debt
Based on Union Pacific’s balance sheet as of April 23, 2020, long-term debt is at $26.36 billion and current debt is at $1.51 billion, amounting to $27.88 billion in total debt. Adjusted for $1.13 billion in cash-equivalents, the company's net debt is at $26.75 billion.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Union Pacific’s $62.22 billion in total assets, the debt-ratio is at 0.45. 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. For example, a debt ratio of 40% might be higher for one industry, whereas normal for another.
Why Debt Is Important
Besides equity, debt is an important factor in the capital structure of a company, and contributes to its growth. Due to its lower financing cost compared to equity, it becomes an attractive option for executives trying to raise capital.
However, interest-payment obligations can have an adverse impact on the cash-flow of the company. Equity owners can keep excess profit, generated from the debt capital, when companies use the debt capital for its business operations.
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