Over the past three months, shares of Texas Instruments Inc. (NASDAQ: TXN) moved higher by 19.67%. Before having a look at the importance of debt, let's look at how much debt Texas Instruments has.
Texas Instruments's Debt
Based on Texas Instruments’s balance sheet as of April 22, 2020, long-term debt is at $5.50 billion and current debt is at $1.05 billion, amounting to $6.55 billion in total debt. Adjusted for $2.52 billion in cash-equivalents, the company's net debt is at $4.03 billion.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Texas Instruments’s $17.28 billion in total assets, the debt-ratio is at 0.38. 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 40% might be higher for one industry, whereas 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.
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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