Over the past three months, shares of PG&E Inc. PCG moved higher by 11.30%. Before having a look at the importance of debt, let's look at how much debt PG&E has.
Based on PG&E's financial statement as of October 27, 2022, long-term debt is at $47.85 billion and current debt is at $3.26 billion, amounting to $51.12 billion in total debt. Adjusted for $262.00 million in cash-equivalents, the company's net debt is at $50.86 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, investors look at the debt ratio. Considering PG&E's $117.01 billion in total assets, the debt-ratio is at 0.44. As a rule of thumb, a debt-ratio more than 1 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 25% might be higher for one industry, but average for another.
Importance of Debt
Debt is an important factor in the capital structure of a company, and can help it attain growth. Debt usually has a relatively lower financing cost than equity, which makes it an attractive option for executives.
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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