Over the past three months, shares of Coca-Cola's Inc. KO fell by 5.66%. Before we understand the importance of debt, let's look at how much debt Coca-Cola's has.
According to the Coca-Cola's's most recent balance sheet as reported on October 26, 2022, total debt is at $39.59 billion, with $35.46 billion in long-term debt and $4.12 billion in current debt. Adjusting for $10.13 billion in cash-equivalents, the company has a net debt of $29.46 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 includes 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. Coca-Cola's has $92.47 billion in total assets, therefore making the debt-ratio 0.43. Generally speaking, a debt-ratio more than 1 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. For example, a debt ratio of 35% might be higher for one industry, but normal for another.
Importance of 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.
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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