How Does Twitter's Debt Look?

Over the past three months, shares of Twitter TWTR moved higher by 4.21%. Before we understand the importance of debt, let us look at how much debt Twitter has.

Twitter's Debt

Based on Twitter's balance sheet as of October 30, 2020, long-term debt is at $2.55 billion and current debt is at $908.61 million, amounting to $3.46 billion in total debt. Adjusted for $2.20 billion in cash-equivalents, the company's net debt is at $1.26 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. Twitter has $13.09 billion in total assets, therefore making the debt-ratio 0.26. 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.

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, 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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