Shares of Baker Hughes BKR rose by 2.42% in the past three months. Before we understand the importance of debt, let us look at how much debt Baker Hughes has.
Baker Hughes's Debt
Based on Baker Hughes's balance sheet as of April 23, 2021, long-term debt is at $6.73 billion and current debt is at $887.00 million, amounting to $7.62 billion in total debt. Adjusted for $4.38 billion in cash-equivalents, the company's net debt is at $3.24 billion.
Let's define some of the terms we used in the paragraph above. Current debt is the portion of a company's debt which is due within 1 year, while long-term debt is the portion due in more than 1 year. Cash equivalents include cash and any liquid securities with maturity periods of 90 days or less. Total debt equals current debt plus long-term debt minus cash equivalents.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Baker Hughes's $36.84 billion in total assets, the debt-ratio is at 0.21. 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.
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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