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Over the past three months, shares of ON Semiconductor (NASDAQ: ON) increased by 27.36%. Before we understand the importance of debt, let us look at how much debt ON Semiconductor has.
ON Semiconductor's Debt
Based on ON Semiconductor’s balance sheet as of August 10, 2020, long-term debt is at $4.04 billion and current debt is at $695.60 million, amounting to $4.74 billion in total debt. Adjusted for $2.06 billion in cash-equivalents, the company's net debt is at $2.68 billion.
Investors look at the debt-ratio to understand how much financial leverage a company has. ON Semiconductor has $9.53 billion in total assets, therefore making the debt-ratio 0.5. 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 normal for another.
Why Investors 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.
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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