Over the past three months, shares of Tesla Inc. TSLA moved lower by 25.85%. Before we understand the importance of debt, let’s look at how much debt Tesla has.
Based on Tesla’s balance sheet as of October 24, 2022, long-term debt is at $2.10 billion and current debt is at $1.46 billion, amounting to $3.55 billion in total debt. Adjusted for $19.53 billion in cash-equivalents, the company’s net debt is at $-15 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 Tesla’s $74.43 billion in total assets, the debt-ratio is at 0.05. As a rule of thumb, a debt-ratio more than 1 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 25% might be higher for one industry, but average for another.
Why Investors Look At 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. 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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This article was generated by Benzinga’s automated content engine and reviewed by an editor.