A Look Into Merck & Co's Debt

Over the past three months, shares of Merck & Co MRK increased by 3.31%. Before having a look at the importance of debt, let us look at how much debt Merck & Co has.

Merck & Co's Debt

Based on Merck & Co's balance sheet as of November 5, 2021, long-term debt is at $22.91 billion and current debt is at $3.53 billion, amounting to $26.44 billion in total debt. Adjusted for $10.02 billion in cash-equivalents, the company's net debt is at $16.43 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. Merck & Co has $93.49 billion in total assets, therefore making the debt-ratio 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 Shareholders Look At 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.

Interest-payment obligations can impact the cash-flow of the company. 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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