Over the past three months, shares of Element Solutions (NYSE:ESI) rose by 20.79%. Before having a look at the importance of debt, let us look at how much debt Element Solutions has.
Element Solutions's Debt
Based on Element Solutions's balance sheet as of April 29, 2021, long-term debt is at $1.51 billion and current debt is at $7.40 million, amounting to $1.51 billion in total debt. Adjusted for $317.50 million in cash-equivalents, the company's net debt is at $1.20 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 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 Element Solutions's $4.48 billion in total assets, the debt-ratio is at 0.34. 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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