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Over the past three months, shares of Hanesbrands (NYSE:HBI) rose by 50.23%. Before having a look at the importance of debt, let us look at how much debt Hanesbrands has.
Based on Hanesbrands's financial statement as of November 5, 2020, long-term debt is at $3.97 billion and current debt is at $5.26 million, amounting to $3.98 billion in total debt. Adjusted for $731.48 million in cash-equivalents, the company's net debt is at $3.25 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, shareholders look at the debt ratio. Considering Hanesbrands's $8.16 billion in total assets, the debt-ratio is at 0.49. 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 Shareholders Look At 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.
Interest-payment obligations can impact 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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