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Shares of AT&T Inc. (NYSE: T) decreased by 2.56% in the past three months. Before we understand the importance of debt, let's look at how much debt AT&T has.
Based on AT&T’s balance sheet as of August 5, 2020, long-term debt is at $153.39 billion and current debt is at $15.58 billion, amounting to $168.96 billion in total debt. Adjusted for $16.94 billion in cash-equivalents, the company's net debt is at $152.02 billion.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering AT&T’s $547.90 billion in total assets, the debt-ratio is at 0.31. 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. For example, a debt ratio of 40% might be higher for one industry, whereas normal 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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