Over the past three months, shares of Consolidated Edison (NYSE: ED) increased by 5.82%. Before having a look at the importance of debt, let us look at how much debt Consolidated Edison has.
Consolidated Edison's Debt
Based on Consolidated Edison’s balance sheet as of August 6, 2020, long-term debt is at $19.15 billion and current debt is at $3.93 billion, amounting to $23.08 billion in total debt. Adjusted for $1.14 billion in cash-equivalents, the company's net debt is at $21.93 billion.
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 Consolidated Edison’s $59.08 billion in total assets, the debt-ratio is at 0.39. 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 35% might be higher for one industry and average for another.
Why Debt Is Important
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. Equity owners can keep excess profit, generated from the debt capital, when companies use the debt capital for its business operations.
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