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Over the past three months, shares of Schlumberger (NYSE:SLB) rose by 59.71%. Before having a look at the importance of debt, let us look at how much debt Schlumberger has.
Based on Schlumberger's balance sheet as of October 21, 2020, long-term debt is at $16.47 billion and current debt is at $1.29 billion, amounting to $17.76 billion in total debt. Adjusted for $1.22 billion in cash-equivalents, the company's net debt is at $16.54 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. Schlumberger has $44.07 billion in total assets, therefore making the debt-ratio 0.4. 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 average for another.
Why Debt Is Important
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.
However, due to interest-payment obligations, cash-flow of a company can be impacted. 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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