Over the past three months, shares of GTT Communications (NYSE:GTT) decreased by 32.02%. Before we understand the importance of debt, let us look at how much debt GTT Communications has.
GTT Communications's Debt
According to the GTT Communications’s most recent financial statement as reported on May 8, 2020, total debt is at $3.30 billion, with $3.26 billion in long-term debt and $35.00 million in current debt. Adjusting for $106.40 million in cash-equivalents, the company has a net debt of $3.19 billion.
Investors look at the debt-ratio to understand how much financial leverage a company has. GTT Communications has $4.74 billion in total assets, therefore making the debt-ratio 0.7. Generally speaking, a debt-ratio more than one 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. A debt ratio of 25% might be higher for one industry and average 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. 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.