Over the past three months, shares of Ford Motor Inc. F decreased by 6.49%. When understanding a companies price change over a time period like 3 months, it could be helpful to look at its financials. One key aspect of a companies financials is its debt, but before we understand the importance of debt, let's look at how much debt Ford Motor has.
Ford Motor Debt
Based on Ford Motor's balance sheet as of October 27, 2022, long-term debt is at $84.28 billion and current debt is at $44.05 billion, amounting to $128.33 billion in total debt. Adjusted for $21.55 billion in cash-equivalents, the company's net debt is at $106.78 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.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Ford Motor's $246.92 billion in total assets, the debt-ratio is at 0.52. 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. A debt ratio of 35% might be higher for one industry, but 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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This article was generated by Benzinga's automated content engine and reviewed by an editor.
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