Actions of First Energy (NYSE: FE) has fallen 2.48% in the past three months. Before understanding the importance of debt, let’s take a look at FirstEnergy’s debt amount.
Based on FirstEnergy’s financial statements as of July 22, 2021, long-term debt is $ 23.02 billion and current debt is $ 1.53 billion, for a total debt of $ 24.55. billions of dollars. Adjusted for $ 1.25 billion in cash equivalents, the company’s net debt stands at $ 23.30 billion.
Let’s define some of the terms we used in the paragraph above. Short-term debt is the portion of a company’s debt that is owed less than a year, while long-term debt is the portion over one year. Cash equivalents include cash and all liquid securities with maturity periods of 90 days or less. Total debt equals current debt plus long-term debt minus cash equivalents.
To understand a company’s degree of financial leverage, shareholders look at the debt ratio. Considering FirstEnergy’s total assets of $ 44.36 billion, the debt ratio is 0.55. Generally speaking, a debt ratio greater than one means that a large part of the debt is financed by assets. As the debt ratio rises, the risk of default increases if interest rates rise. Different industries have different tolerance thresholds for debt ratios. A debt ratio of 40% may be higher for one industry and average for another.
Why do shareholders watch the debt?
Besides equity, debt is an important factor in a company’s capital structure and contributes to its growth. Due to its lower cost of financing compared to equity, it becomes an attractive option for executives trying to raise capital.
However, interest payment obligations can have a negative impact on the company’s cash flow. Stock owners can keep excess profits, generated by debt capital, when companies use debt capital for their business operations.
Are you looking for stocks with a low debt ratio? Check out Benzinga Pro, a market research platform that gives investors near instant access to dozens of stock market metrics, including the debt ratio. Click here to find out more.