Over the past three months, shares of SAP Inc. SAP increased by 22.81%. Before having a look at the importance of debt, let’s look at how much debt SAP has.
According to the SAP’s most recent balance sheet as reported on February 27, 2020, total debt is at $18.19 billion, with $14.52 billion in long-term debt and $3.67 billion in current debt. Adjusting for $5.97 billion in cash-equivalents, the company has a net debt of $12.23 billion.
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 includes 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.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. SAP has $67.60 billion in total assets, therefore making the debt-ratio 0.27. 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 35% might be higher for one industry, but average for another.
Why Debt Is Important
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, interest-payment obligations can have an adverse impact on 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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This article was generated by Benzinga’s automated content engine and reviewed by an editor.