Market Overview

A Look Into Tesla's Debt

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Shares of Tesla (NASDAQ: TSLA) moved higher by 122.83% in the past three months. Before having a look at the importance of debt, let us look at how much debt Tesla has.

Tesla's Debt

Based on Tesla’s financial statement as of July 28, 2020, long-term debt is at $10.42 billion and current debt is at $3.68 billion, amounting to $14.10 billion in total debt. Adjusted for $8.62 billion in cash-equivalents, the company's net debt is at $5.48 billion.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Tesla’s $38.13 billion in total assets, the debt-ratio is at 0.37. 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 35% 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.

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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