NVAX) moved higher by 165.32%. Before we understand the importance of debt, let’s look at how much debt Novavax has.
Based on Novavax’s balance sheet as of August 10, 2020, long-term debt is at $321.32 million and current debt is at $5.08 million, amounting to $326.40 million in total debt. Adjusted for $424.39 million in cash-equivalents, the company’s net debt is at $-97.99 million.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Novavax’s $932.23 million in total assets, the debt-ratio is at 0.35. 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 40% might be higher for one industry, whereas average for another.
Why Shareholders Look At 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, interest-payment obligations can have an adverse impact on the cash-flow of the company. 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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