Over the past three months, shares of Colgate-Palmolive (NYSE:CL) rose by 9.78%. Before having a look at the importance of debt, let us look at how much debt Colgate-Palmolive has.
Based on Colgate-Palmolive’s financial statement as of October 29, 2021, long-term debt is at $7.68 billion and current debt is at $14.00 million, amounting to $7.70 billion in total debt. Adjusted for $958.00 million in cash-equivalents, the company’s net debt is at $6.74 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, investors look at the debt ratio. Considering Colgate-Palmolive’s $15.88 billion in total assets, the debt-ratio is at 0.48. 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 35% might be higher for one industry and normal 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.
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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