What Does Donaldson's Debt Look Like?

Over the past three months, shares of Donaldson DCI moved higher by 6.42%. Before we understand the importance of debt, let us look at how much debt Donaldson has.

Donaldson's Debt

Based on Donaldson's balance sheet as of March 2, 2021, long-term debt is at $495.10 million and current debt is at $22.40 million, amounting to $517.50 million in total debt. Adjusted for $207.30 million in cash-equivalents, the company's net debt is at $310.20 million.

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 Donaldson's $2.27 billion in total assets, the debt-ratio is at 0.23. 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 25% might be higher for one industry and 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.

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.

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