Over the past three months, shares of Walt Disney (NYSE: DIS) increased by 8.54%. Before we look at the importance of debt, let’s take a look at how much debt Walt Disney has.
Walt Disney’s Fault
Based on Walt Disney’s August 4, 2020 financial statement, long-term debt is $54.20 billion and current debt is $10.22 billion, which translates to total debt of $64.42 billion. Adjusted for $23.11 billion in cash equivalents, the company’s net debt is $41.31 billion.
Let’s define some of the terms we used in the section above. Short-term debt is the portion of a company’s debt that falls due within 1 year while long-term debt is the portion that is due over 1 year. Cash equivalents include cash and all liquid securities with a maturity of 90 days or less. Total debt is equal to current debt plus long-term debt minus cash equivalents.
To understand the degree of financial leverage of a company, shareholders look at the debt ratio. Taking into account Walt Disney’s total assets of $207.65 billion, the debt ratio is 0.31. In general, a debt ratio of more than one means that much of the debt is financed by assets. As the debt ratio increases, so does the risk of defaulting loans, should interest rates rise. Different industries have different debt ratio tolerance thresholds. A debt ratio of 40% may be higher for one sector and normal for another.
Why debt is important
In addition to equity, debt is an important factor in a company’s capital structure and contributes to its growth. Due to its lower borrowing costs compared to equity, it becomes an attractive option for executives trying to raise capital.
However, as a result of interest payment obligations, a company’s cash flow can be affected. Financial leverage also allows companies to use additional capital for business operations, allowing equity owners to retain the excess profit generated by the debt capital.
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