Builders FirstSource's Debt Overview

Shares of Builders FirstSource Inc. (NASDAQ: BLDR) rose by 33.39% in the past three months. Before having a look at the importance of debt, let's look at how much debt Builders FirstSource has.

Builders FirstSource's Debt

Based on Builders FirstSource’s balance sheet as of July 31, 2020, long-term debt is at $1.58 billion and current debt is at $23.97 million, amounting to $1.60 billion in total debt. Adjusted for $385.46 million in cash-equivalents, the company's net debt is at $1.22 billion.

To understand the degree of financial leverage a company has, investors look at the debt ratio. Considering Builders FirstSource’s $3.76 billion in total assets, the debt-ratio is at 0.43. 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 35% 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. 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.