Over the past three months, shares of IBM (NYSE:IBM) moved higher by 9.04%. Before having a look at the importance of debt, let us look at how much debt IBM has.
According to the IBM’s most recent balance sheet as reported on November 5, 2021, total debt is at $54.50 billion, with $46.93 billion in long-term debt and $7.58 billion in current debt. Adjusting for $7.46 billion in cash-equivalents, the company has a net debt of $47.05 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 IBM’s $144.21 billion in total assets, the debt-ratio is at 0.38. As a rule of thumb, a debt-ratio more than one 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 and normal 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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