Arcos Dorados's Debt Overview

Over the past three months, shares of Arcos Dorados Holdings Inc. ARCO increased by 46.70%. Before we understand the importance of debt, let's look at how much debt Arcos Dorados Holdings has.

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Arcos Dorados Holdings's Debt

Based on Arcos Dorados Holdings’s balance sheet as of April 29, 2020, long-term debt is at $647.70 million and current debt is at $28.50 million, amounting to $676.20 million in total debt. Adjusted for $121.88 million in cash-equivalents, the company's net debt is at $554.32 million.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Arcos Dorados Holdings’s $2.56 billion in total assets, the debt-ratio is at 0.26. 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 40% might be higher for one industry, whereas average for another.

Why Debt Is Important

Debt is an important factor in the capital structure of a company, and can help it attain growth. Debt usually has a relatively lower financing cost than equity, which makes it an attractive option for executives.

Interest-payment obligations can impact 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.