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Over the past three months, shares of China Automotive Systems Inc. (NASDAQ: CAAS) rose by 70.60%. Before having a look at the importance of debt, let's look at how much debt China Automotive Systems has.
China Automotive Systems's Debt
According to the China Automotive Systems’s most recent balance sheet as reported on August 14, 2020, total debt is at $58.19 million, with $3.00 million in long-term debt and $55.19 million in current debt. Adjusting for $80.38 million in cash-equivalents, the company has a net debt of $-22.19 million.
Investors look at the debt-ratio to understand how much financial leverage a company has. China Automotive Systems has $631.19 million in total assets, therefore making the debt-ratio 0.09. 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. A debt ratio of 25% might be higher for one industry, whereas average for another.
Importance of 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, 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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