Shares of Pfizer Inc. (NYSE: PFE) moved lower by 7.46% in the past three months. Before we understand the importance of debt, let's look at how much debt Pfizer has.
Based on Pfizer’s financial statement as of May 7, 2020, long-term debt is at $36.28 billion and current debt is at $16.01 billion, amounting to $52.29 billion in total debt. Adjusted for $2.15 billion in cash-equivalents, the company's net debt is at $50.14 billion.
Investors look at the debt-ratio to understand how much financial leverage a company has. Pfizer has $166.34 billion in total assets, therefore making the debt-ratio 0.31. Generally speaking, a debt-ratio more than 1 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, whereas average 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, interest-payment obligations can have an adverse impact on the cash-flow of the company. 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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