Over the past three months, shares of Teekay TK rose by 26.45%. Before having a look at the importance of debt, let us look at how much debt Teekay has.
Based on Teekay's financial statement as of April 1, 2021, long-term debt is at $3.34 billion and current debt is at $421.77 million, amounting to $3.77 billion in total debt. Adjusted for $348.79 million in cash-equivalents, the company's net debt is at $3.42 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.
Investors look at the debt-ratio to understand how much financial leverage a company has. Teekay has $6.95 billion in total assets, therefore making the debt-ratio 0.54. 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 25% might be higher for one industry and normal for another.
Why Investors 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. 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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