Over the past three months, shares of Domtar (NYSE:UFS) moved higher by 43.60%. Before we understand the importance of debt, let us look at how much debt Domtar has.
According to the Domtar's most recent financial statement as reported on March 1, 2021, total debt is at $1.10 billion, with $1.08 billion in long-term debt and $13.00 million in current debt. Adjusting for $309.00 million in cash-equivalents, the company has a net debt of $788.00 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.
Investors look at the debt-ratio to understand how much financial leverage a company has. Domtar has $4.86 billion in total assets, therefore making the debt-ratio 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 40% might be higher for one industry and normal 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, 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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