GE) fell by 5.88%. Before we understand the importance of debt, let’s look at how much debt General Electric has.
General Electric’s Debt
Based on General Electric’s balance sheet as of July 29, 2020, long-term debt is at $0.00 and current debt is at $81.88 billion, amounting to $81.88 billion in total debt. Adjusted for $41.43 billion in cash-equivalents, the company’s net debt is at $40.45 billion.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering General Electric’s $256.49 billion in total assets, the debt-ratio is at 0.32. 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 25% might be higher for one industry, whereas average for another.
Importance of Debt
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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