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Shares of Snap-on (NYSE:SNA) increased by 7.97% in the past three months. Before we understand the importance of debt, let us look at how much debt Snap-on has.
According to the Snap-on's most recent balance sheet as reported on October 22, 2020, total debt is at $1.45 billion, with $1.18 billion in long-term debt and $267.90 million in current debt. Adjusting for $787.50 million in cash-equivalents, the company has a net debt of $662.20 million.
Let's define some of the terms we used in the paragraph above. Current debt is the portion of a company's debt which is due within 1 year, while long-term debt is the portion due in more than 1 year. Cash equivalents include cash and any liquid securities with maturity periods of 90 days or less. Total debt equals current debt plus long-term debt minus cash equivalents.
To understand the degree of financial leverage a company has, investors look at the debt ratio. Considering Snap-on's $6.27 billion in total assets, the debt-ratio is at 0.23. As a rule of thumb, a debt-ratio more than one 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 35% might be higher for one industry and average 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.
Interest-payment obligations can impact 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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