Over the past three months, shares of 3M MMM increased by 7.49%. Before having a look at the importance of debt, let us look at how much debt 3M has.
3M's Debt
According to the 3M’s most recent financial statement as reported on July 28, 2020, total debt is at $20.76 billion, with $19.28 billion in long-term debt and $1.49 billion in current debt. Adjusting for $4.22 billion in cash-equivalents, the company has a net debt of $16.54 billion.
To understand the degree of financial leverage a company has, investors look at the debt ratio. Considering 3M’s $45.08 billion in total assets, the debt-ratio is at 0.46. 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 average 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.
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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