Market Overview

Dollar Tree's Debt Overview

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Over the past three months, shares of Dollar Tree Inc. (NASDAQ: DLTR) moved higher by 1.05%. Before we understand the importance of debt, let's look at how much debt Dollar Tree has.

Dollar Tree's Debt

According to the Dollar Tree’s most recent financial statement as reported on May 28, 2020, total debt is at $4.27 billion, with $3.22 billion in long-term debt and $1.05 billion in current debt. Adjusting for $1.76 billion in cash-equivalents, the company has a net debt of $2.52 billion.

Shareholders look at the debt-ratio to understand how much financial leverage a company has. Dollar Tree has $20.47 billion in total assets, therefore making the debt-ratio 0.21. 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.

Importance of 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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