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Shares of Apache Inc. (NASDAQ: APA) increased by 15.11% in the past three months. Before we understand the importance of debt, let's look at how much debt Apache has.
Based on Apache’s financial statement as of July 30, 2020, long-term debt is at $8.52 billion and current debt is at $294.00 million, amounting to $8.82 billion in total debt. Adjusted for $135.00 million in cash-equivalents, the company's net debt is at $8.68 billion.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Apache’s $13.00 billion in total assets, the debt-ratio is at 0.68. 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. For example, a debt ratio of 25% might be higher for one industry, whereas normal for another.
Why Shareholders Look At Debt?
Debt is an important factor in the capital structure of a company, and can help it attain growth. Debt usually has a relatively lower financing cost than equity, which makes it an attractive option for executives.
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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