A Look Into Freeport-McMoRan's Debt


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.

Freeport-McMoRan's Debt

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.

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