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Shares of VMware (NYSE: VMW) rose by 2.98% in the past three months. Before having a look at the importance of debt, let us look at how much debt VMware has.
According to the VMware’s most recent financial statement as reported on September 4, 2020, total debt is at $6.21 billion, with $4.71 billion in long-term debt and $1.50 billion in current debt. Adjusting for $4.70 billion in cash-equivalents, the company has a net debt of $1.51 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.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. VMware has $28.18 billion in total assets, therefore making the debt-ratio 0.22. 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. 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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