Market Overview

Johnson & Johnson's Debt Overview

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Over the past three months, shares of Johnson & Johnson Inc. (NYSE: JNJ) increased by 3.90%. Before we understand the importance of debt, let's look at how much debt Johnson & Johnson has.

Johnson & Johnson's Debt

Based on Johnson & Johnson’s balance sheet as of July 24, 2020, long-term debt is at $25.06 billion and current debt is at $5.33 billion, amounting to $30.39 billion in total debt. Adjusted for $11.17 billion in cash-equivalents, the company's net debt is at $19.22 billion.

Investors look at the debt-ratio to understand how much financial leverage a company has. Johnson & Johnson has $158.38 billion in total assets, therefore making the debt-ratio 0.19. 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 40% might be higher for one industry, whereas average 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, due to interest-payment obligations, cash-flow of a company can be impacted. 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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