Market Overview

Arcos Dorados's Debt Overview

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Over the past three months, shares of Arcos Dorados Holdings Inc. (NYSE: ARCO) increased by 46.70%. Before we understand the importance of debt, let's look at how much debt Arcos Dorados Holdings has.

Arcos Dorados Holdings's Debt

Based on Arcos Dorados Holdings’s balance sheet as of April 29, 2020, long-term debt is at $647.70 million and current debt is at $28.50 million, amounting to $676.20 million in total debt. Adjusted for $121.88 million in cash-equivalents, the company's net debt is at $554.32 million.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Arcos Dorados Holdings’s $2.56 billion in total assets, the debt-ratio is at 0.26. 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 Debt Is Important

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.

Interest-payment obligations can impact 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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