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Shares of Franchise Group Inc. (NASDAQ: FRG) rose by 26.08% in the past three months. Before having a look at the importance of debt, let's look at how much debt Franchise Group has.
Franchise Group's Debt
According to the Franchise Group’s most recent financial statement as reported on August 5, 2020, total debt is at $1.17 billion, with $963.40 million in long-term debt and $203.49 million in current debt. Adjusting for $105.47 million in cash-equivalents, the company has a net debt of $1.06 billion.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. Franchise Group has $1.88 billion in total assets, therefore making the debt-ratio 0.62. 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 40% might be higher for one industry, whereas normal for another.
Why Shareholders Look At Debt?
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.
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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