Norfolk Southern's Debt Overview
Over the past three months, shares of Norfolk Southern (NYSE: NSC) moved higher by 22.49%. Before we understand the importance of debt, let us look at how much debt Norfolk Southern has.
Norfolk Southern's Debt
Based on Norfolk Southern’s balance sheet as of July 29, 2020, long-term debt is at $12.61 billion and current debt is at $85.00 million, amounting to $12.70 billion in total debt. Adjusted for $1.14 billion in cash-equivalents, the company's net debt is at $11.55 billion.
Investors look at the debt-ratio to understand how much financial leverage a company has. Norfolk Southern has $37.96 billion in total assets, therefore making the debt-ratio 0.33. 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 25% might be higher for one industry and normal 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.
However, due to interest-payment obligations, cash-flow of a company can be impacted. 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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