Over the past three months, shares of Brown & Brown (NYSE:BRO) moved lower by 0.75%. Before we understand the importance of debt, let us look at how much debt Brown & Brown has.
Brown & Brown’s Debt
According to the Brown & Brown’s most recent financial statement as reported on October 26, 2021, total debt is at $2.05 billion, with $1.76 billion in long-term debt and $290.00 million in current debt. Adjusting for $943.97 million in cash-equivalents, the company has a net debt of $1.10 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.
To understand the degree of financial leverage a company has, investors look at the debt ratio. Considering Brown & Brown’s $9.63 billion in total assets, the debt-ratio is at 0.21. 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 40% might be higher for one industry and normal 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. 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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