What Does Smith & Nephew's Debt Look Like?

Shares of Smith & Nephew SNN moved lower by 3.44% in the past three months. Before having a look at the importance of debt, let us look at how much debt Smith & Nephew has.

Smith & Nephew's Debt

According to the Smith & Nephew’s most recent balance sheet as reported on March 4, 2016, total debt is at $1.81 billion, with $1.57 billion in long-term debt and $239.00 million in current debt. Adjusting for $120.00 million in cash-equivalents, the company has a net debt of $1.69 billion.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Smith & Nephew’s $7.17 billion in total assets, the debt-ratio is at 0.25. 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 25% might be higher for one industry and average for another.

Why Shareholders Look At 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.

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.