How Does Lithia Motors' Debt Look Like?

Over the past three months, shares of Lithia Motors Inc. LAD moved higher by 70.27%. Before having a look at the importance of debt, let's look at how much debt Lithia Motors has.

Lithia Motors's Debt

Based on Lithia Motors’s balance sheet as of April 24, 2020, long-term debt is at $1.49 billion and current debt is at $2.03 billion, amounting to $3.52 billion in total debt. Adjusted for $56.60 million in cash-equivalents, the company's net debt is at $3.46 billion.

To understand the degree of financial leverage a company has, investors look at the debt ratio. Considering Lithia Motors’s $6.01 billion in total assets, the debt-ratio is at 0.59. Generally speaking, a debt-ratio more than 1 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 35% might be higher for one industry, whereas average for another.

Why Investors 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, due to interest-payment obligations, cash-flow of a company can be impacted. 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.