Over the past three months, shares of KAR Auction Services (NYSE:KAR) moved lower by 10.41%. Before having a look at the importance of debt, let us look at how much debt KAR Auction Services has.
KAR Auction Services's Debt
According to the KAR Auction Services's most recent financial statement as reported on August 4, 2021, total debt is at $3.21 billion, with $1.85 billion in long-term debt and $1.35 billion in current debt. Adjusting for $621.60 million in cash-equivalents, the company has a net debt of $2.58 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.
Shareholders look at the debt-ratio to understand how much financial leverage a company has. KAR Auction Services has $7.12 billion in total assets, therefore making the debt-ratio 0.45. 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 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.
However, due to interest-payment obligations, cash-flow of a company can be impacted. 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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