Shares of Eli Lilly (NYSE:LLY) decreased by 10.90% in the past three months. Before we look at the importance of debt, let’s take a look at how much debt Eli Lilly has.
Eli Lilly’s fault
According to Eli Lilly’s most recent balance sheet, as reported on February 17, 2021, the total debt is $ 16.60 billion, with $ 16.59 billion in long-term debt and $ 8.70 million in current debt. Adjusted for $ 3.66 billion in cash equivalents, the company has $ 12.94 billion in net debt.
Let’s define some of the terms we used in the above section. Current debt is the portion of a company’s debt that is due within 1 year, while long-term debt is the portion that is due in more than 1 year. Cash equivalents include cash and any liquid securities with a maturity of 90 days or less. Total debt is equal to current debt plus long-term debt less cash equivalents.
To understand a company’s degree of financial leverage, investors look at its debt ratio. Taking into account Eli Lilly’s total assets of $ 46.63 billion, the debt ratio is 0.36. As a rule of thumb, a debt ratio more than one indicates that a significant portion of debt is funded by assets. A higher debt ratio could also mean that the company could put itself at risk if interest rates were to rise. However, debt ratios vary widely between different industries. A debt ratio of 40% may be higher for one industry and average for another.
Why do investors look at debt?
In addition to equity, debt is an important factor in a company’s capital structure and contributes to its growth. Due to the lower cost of financing compared to equity, it becomes an attractive option for executives trying to raise capital.
However, interest payment obligations can negatively impact the company’s cash flow. Owners of equity instruments can retain excess profit generated from the loan capital when companies use the loan capital for their business activities.
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