Over the past three months, shares of Ardmore Shipping ASC fell by 34.13%. Before having a look at the importance of debt, let us look at how much debt Ardmore Shipping has.
Ardmore Shipping's Debt
Based on Ardmore Shipping’s balance sheet as of April 3, 2020, long-term debt is at $384.77 million and current debt is at $39.07 million, amounting to $423.84 million in total debt. Adjusted for $51.72 million in cash-equivalents, the company's net debt is at $372.12 million.
To understand the degree of financial leverage a company has, investors look at the debt ratio. Considering Ardmore Shipping’s $772.44 million in total assets, the debt-ratio is at 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 40% might be higher for one industry and average for another.
Why Debt Is Important
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, 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.
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