Over the past three months, shares of Pfizer (NYSE:PFE) decreased by 7.71%. Before we understand the importance of debt, let us look at how much debt Pfizer has.
Based on Pfizer’s financial statement as of November 5, 2020, long-term debt is at $49.78 billion and current debt is at $13.36 billion, amounting to $63.15 billion in total debt. Adjusted for $1.59 billion in cash-equivalents, the company’s net debt is at $61.56 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.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Pfizer’s $178.98 billion in total assets, the debt-ratio is at 0.35. 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 25% 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. 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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