Over the past three months, shares of Bristol-Myers Squibb Inc. (NYSE:BMY) rose by 2.13%. Before we understand the importance of debt, let's look at how much debt Bristol-Myers Squibb has.
Bristol-Myers Squibb's Debt
Based on Bristol-Myers Squibb's balance sheet as of October 26, 2022, long-term debt is at $36.97 billion and current debt is at $2.13 billion, amounting to $39.10 billion in total debt. Adjusted for $7.73 billion in cash-equivalents, the company's net debt is at $31.36 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 includes 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 Bristol-Myers Squibb's $98.20 billion in total assets, the debt-ratio is at 0.4. 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. For example, a debt ratio of 35% might be higher for one industry, but normal 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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This article was generated by Benzinga's automated content engine and reviewed by an editor.
