A Look Into Analog Devices' Debt

Over the past three months, shares of Analog Devices Inc. ADI increased by 19.29%. Before we understand the importance of debt, let's look at how much debt Analog Devices has.

Analog Devices's Debt

Based on Analog Devices’s financial statement as of May 20, 2020, long-term debt is at $5.14 billion and current debt is at $448.94 million, amounting to $5.59 billion in total debt. Adjusted for $784.94 million in cash-equivalents, the company's net debt is at $4.81 billion.

Shareholders look at the debt-ratio to understand how much financial leverage a company has. Analog Devices has $21.35 billion in total assets, therefore making the debt-ratio 0.26. As a rule of thumb, a debt-ratio more than 1 indicates that a considerable portion of debt is funded by assets. A higher debt-ratio can also imply that the company might be putting itself at risk for default, if interest rates were to increase. However, debt-ratios vary widely across different industries. For example, a debt ratio of 35% might be higher for one industry, whereas normal 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.

However, interest-payment obligations can have an adverse impact on 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.