Over the past three months, shares of Mallinckrodt MNK decreased by 54.00%. Before having a look at the importance of debt, let us look at how much debt Mallinckrodt has.
Mallinckrodt's Debt
Based on Mallinckrodt’s balance sheet as of August 4, 2020, long-term debt is at $5.22 billion and current debt is at $86.70 million, amounting to $5.31 billion in total debt. Adjusted for $818.30 million in cash-equivalents, the company's net debt is at $4.49 billion.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. Mallinckrodt has $9.69 billion in total assets, therefore making the debt-ratio 0.55. As a rule of thumb, a debt-ratio more than one indicates that a considerable portion of debt is funded by assets. A higher debt-ratio can also imply that the company might be putting itself at risk for default, if interest rates were to increase. However, debt-ratios vary widely across different industries. A debt ratio of 25% might be higher for one industry and 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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