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Over the past three months, shares of Phillips 66 (NYSE: PSX) fell by 24.86%. Before we understand the importance of debt, let us look at how much debt Phillips 66 has.
Phillips 66's Debt
Based on Phillips 66’s financial statement as of July 31, 2020, long-term debt is at $12.66 billion and current debt is at $1.78 billion, amounting to $14.45 billion in total debt. Adjusted for $1.89 billion in cash-equivalents, the company's net debt is at $12.56 billion.
To understand the degree of financial leverage a company has, investors look at the debt ratio. Considering Phillips 66’s $54.52 billion in total assets, the debt-ratio is at 0.26. 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 25% might be higher for one industry and normal for another.
Importance Of 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, due to interest-payment obligations, cash-flow of a company can be impacted. 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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