Over the past three months, shares of DHT Holdings (NYSE: DHT) rose by 8.57%. Before we understand the importance of debt, let us look at how much debt DHT Holdings has.
DHT Holdings's Debt
Based on DHT Holdings’s financial statement as of May 5, 2016, long-term debt is at $601.06 million and current debt is at $53.34 million, amounting to $654.40 million in total debt. Adjusted for $77.53 million in cash-equivalents, the company's net debt is at $576.87 million.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering DHT Holdings’s $1.42 billion in total assets, the debt-ratio is at 0.46. 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 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, due to interest-payment obligations, cash-flow of a company can be impacted. 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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