Over the past three months, shares of Visa (NYSE:V) moved higher by 2.48%. Before having a look at the importance of debt, let us look at how much debt Visa has.
Based on Visa’s financial statement as of July 31, 2020, long-term debt is at $17.88 billion and current debt is at $3.00 billion, amounting to $20.88 billion in total debt. Adjusted for $13.90 billion in cash-equivalents, the company's net debt is at $6.98 billion.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. Visa has $77.88 billion in total assets, therefore making the debt-ratio 0.27. 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 40% might be higher for one industry and average 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.
Interest-payment obligations can impact 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.