Shares of Hersha Hospitality HT fell by 9.58% in the past three months. Before having a look at the importance of debt, let us look at how much debt Hersha Hospitality has.
Hersha Hospitality's Debt
Based on Hersha Hospitality's balance sheet as of July 28, 2021, long-term debt is at $918.77 million and current debt is at $193.72 million, amounting to $1.11 billion in total debt. Adjusted for $69.08 million in cash-equivalents, the company's net debt is at $1.04 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.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. Hersha Hospitality has $1.86 billion in total assets, therefore making the debt-ratio 0.6. 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 Shareholders Look At 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.
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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