Over the past three months, shares of Alcoa AA moved higher by 2.85%. Before having a look at the importance of debt, let us look at how much debt Alcoa has.
Alcoa's Debt
Based on Alcoa’s balance sheet as of July 29, 2020, long-term debt is at $1.80 billion and current debt is at $1.00 million, amounting to $1.80 billion in total debt. Adjusted for $965.00 million in cash-equivalents, the company's net debt is at $836.00 million.
Investors look at the debt-ratio to understand how much financial leverage a company has. Alcoa has $13.30 billion in total assets, therefore making the debt-ratio 0.14. 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 40% might be higher for one industry and normal 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. Equity owners can keep excess profit, generated from the debt capital, when companies use the debt capital for its business operations.
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