Suncor Energy's Debt Insights

Over the past three months, shares of Suncor Energy SU moved higher by 17.12%. Before we understand the importance of debt, let us look at how much debt Suncor Energy has.

Suncor Energy's Debt

Based on Suncor Energy's balance sheet as of March 2, 2017, long-term debt is at $22.64 billion and current debt is at $2.11 billion, amounting to $24.75 billion in total debt. Adjusted for $3.02 billion in cash-equivalents, the company's net debt is at $21.74 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 Suncor Energy's $88.70 billion in total assets, the debt-ratio is at 0.28. 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 40% might be higher for one industry and 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. 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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