Over the past three months, shares of Discovery Inc. (NASDAQ: DISCA) increased by 11.69%. Before having a look at the importance of debt, let's look at how much debt Discovery has.
According to the Discovery’s most recent balance sheet as reported on May 6, 2020, total debt is at $15.87 billion, with $15.27 billion in long-term debt and $607.00 million in current debt. Adjusting for $1.45 billion in cash-equivalents, the company has a net debt of $14.42 billion.
To understand the degree of financial leverage a company has, investors look at the debt ratio. Considering Discovery’s $33.39 billion in total assets, the debt-ratio is at 0.48. 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 35% might be higher for one industry, whereas 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.
Interest-payment obligations can impact 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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