Shares of Visa (NYSE:V) rose by 0.28% in the past three months. Before having a look at the importance of debt, let us look at how much debt Visa has.
Visa's Debt
Based on Visa's financial statement as of January 28, 2022, long-term debt is at $17.67 billion and current debt is at $3.25 billion, amounting to $20.92 billion in total debt. Adjusted for $14.72 billion in cash-equivalents, the company's net debt is at $6.20 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 include 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.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. Visa has $81.93 billion in total assets, therefore making the debt-ratio 0.26. As a rule of thumb, a debt-ratio more than one 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 35% might be higher for one industry and normal for another.
Why Debt Is Important
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. Equity owners can keep excess profit, generated from the debt capital, when companies use the debt capital for its business operations.
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