Market Overview

A Look Into General Motors's Debt

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Over the past three months, shares of General Motors (NYSE: GM) increased by 16.60%. Before having a look at the importance of debt, let us look at how much debt General Motors has.

General Motors's Debt

According to the General Motors’s most recent financial statement as reported on July 29, 2020, total debt is at $127.17 billion, with $87.15 billion in long-term debt and $40.02 billion in current debt. Adjusting for $28.23 billion in cash-equivalents, the company has a net debt of $98.94 billion.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering General Motors’s $237.53 billion in total assets, the debt-ratio is at 0.54. Generally speaking, a debt-ratio more than one 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 and 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. 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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