Over the past three months, shares of Coca-Cola Consolidated Inc. COKE increased by 4.79%. Before having a look at the importance of debt, let's look at how much debt Coca-Cola Consolidated has.
Coca-Cola Consolidated Debt
Based on Coca-Cola Consolidated's financial statement as of February 22, 2023, long-term debt is at $606.34 million and current debt is at $4.98 million, amounting to $611.32 million in total debt. Adjusted for $197.65 million in cash-equivalents, the company's net debt is at $413.67 million.
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 Coca-Cola Consolidated's $3.71 billion in total assets, the debt-ratio is at 0.16. 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 40% might be higher for one industry, but normal for another.
Why Debt Is Important
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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