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Over the past three months, shares of Fastenal (NASDAQ: FAST) rose by 4.41%. Before we understand the importance of debt, let us look at how much debt Fastenal has.
Based on Fastenal’s financial statement as of July 17, 2020, long-term debt is at $405.00 million and current debt is at $0.00, amounting to $405.00 million in total debt. Adjusted for $201.50 million in cash-equivalents, the company's net debt is at $203.50 million.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Fastenal’s $4.09 billion in total assets, the debt-ratio is at 0.1. 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 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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