Over the past three months, shares of Freeport-McMoRan FCX decreased by 14.52%. Before having a look at the importance of debt, let us look at how much debt Freeport-McMoRan has.
Based on Freeport-McMoRan's balance sheet as of August 5, 2021, long-term debt is at $8.64 billion and current debt is at $1.06 billion, amounting to $9.70 billion in total debt. Adjusted for $6.31 billion in cash-equivalents, the company's net debt is at $3.38 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, investors look at the debt ratio. Considering Freeport-McMoRan's $45.44 billion in total assets, the debt-ratio is at 0.21. Generally speaking, a debt-ratio more than one means that a large portion of debt is funded by assets. As the debt-ratio increases, so the does the risk of defaulting on loans, if interest rates were to increase. Different industries have different thresholds of tolerance for debt-ratios. A debt ratio of 35% might be higher for one industry and average for another.
Why Debt Is Important
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.
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.
Looking for stocks with low debt-to-equity ratios? Check out Benzinga Pro, a market research platform which provides investors with near-instantaneous access to dozens of stock metrics - including debt-to-equity ratio. Click here to learn more.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.