Shares of MercadoLibre Inc. MELI fell by 6.22% in the past three months. Before having a look at the importance of debt, let’s look at how much debt MercadoLibre has.
Based on MercadoLibre’s balance sheet as of November 4, 2022, long-term debt is at $2.74 billion and current debt is at $1.95 billion, amounting to $4.69 billion in total debt. Adjusted for $1.46 billion in cash-equivalents, the company’s net debt is at $3.23 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.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. MercadoLibre has $11.96 billion in total assets, therefore making the debt-ratio 0.39. Generally speaking, a debt-ratio more than 1 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. For example, a debt ratio of 40% might be higher for one industry, but 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.
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.
Looking for stocks with low debt-to-equity ratios? Check out Benzinga Pro, a market research platform which provides investors with near-instantaneous access to dozens of stock metrics – including debt-to-equity ratio. Click here to learn more.
This article was generated by Benzinga’s automated content engine and reviewed by an editor.