Apple: Debt Overview

Over the past three months, shares of Apple Inc. AAPL increased by 37.21%. Before we understand the importance of debt, let's look at how much debt Apple has.

Apple's Debt

According to the Apple’s most recent financial statement as reported on July 31, 2020, total debt is at $112.72 billion, with $94.05 billion in long-term debt and $18.68 billion in current debt. Adjusting for $33.38 billion in cash-equivalents, the company has a net debt of $79.34 billion.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Apple’s $317.34 billion in total assets, the debt-ratio is at 0.36. 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 25% might be higher for one industry, whereas normal 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.

However, due to interest-payment obligations, cash-flow of a company can be impacted. 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.