L Brands: Debt Overview

Over the past three months, shares of L Brands Inc. LB increased by 68.94%. Before we understand the importance of debt, let's look at how much debt L Brands has.

L Brands's Debt

Based on L Brands’s financial statement as of June 3, 2020, long-term debt is at $5.03 billion and current debt is at $468.00 million, amounting to $5.50 billion in total debt. Adjusted for $957.00 million in cash-equivalents, the company's net debt is at $4.54 billion.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering L Brands’s $9.44 billion in total assets, the debt-ratio is at 0.58. As a rule of thumb, a debt-ratio more than 1 indicates that a considerable portion of debt is funded by assets. A higher debt-ratio can also imply that the company might be putting itself at risk for default, if interest rates were to increase. However, debt-ratios vary widely across different industries. A debt ratio of 25% might be higher for one industry, whereas average for another.

Importance of Debt

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.

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.