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Over the past three months, shares of Babcock & Wilcox (NYSE:BW) rose by 59.37%. Before having a look at the importance of debt, let us look at how much debt Babcock & Wilcox has.
Babcock & Wilcox's Debt
According to the Babcock & Wilcox's most recent financial statement as reported on March 8, 2021, total debt is at $377.32 million, with $377.32 million in long-term debt and $0.00 in current debt. Adjusting for $57.34 million in cash-equivalents, the company has a net debt of $319.98 million.
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 Babcock & Wilcox's $591.79 million in total assets, the debt-ratio is at 0.64. As a rule of thumb, a debt-ratio more than one 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. A debt ratio of 40% might be higher for one industry and normal for another.
Why Investors 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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