Over the past three months, shares of Schlumberger Inc. (NYSE: SLB) increased by 21.05%. Before having a look at the importance of debt, let's look at how much debt Schlumberger has.
Based on Schlumberger’s balance sheet as of April 22, 2020, long-term debt is at $15.41 billion and current debt is at $1.23 billion, amounting to $16.64 billion in total debt. Adjusted for $1.38 billion in cash-equivalents, the company's net debt is at $15.27 billion.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. Schlumberger has $48.59 billion in total assets, therefore making the debt-ratio 0.34. 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. A debt ratio of 25% might be higher for one industry, whereas average 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.
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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