A Look Into ABB's Debt

Over the past three months, shares of ABB ABB fell by 5.22%. Before we understand the importance of debt, let us look at how much debt ABB has.

ABB's Debt

Based on ABB's financial statement as of February 26, 2021, long-term debt is at $4.83 billion and current debt is at $1.29 billion, amounting to $6.12 billion in total debt. Adjusted for $3.28 billion in cash-equivalents, the company's net debt is at $2.84 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.

To understand the degree of financial leverage a company has, investors look at the debt ratio. Considering ABB's $41.09 billion in total assets, the debt-ratio is at 0.15. 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 normal for another.

Importance Of Debt

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.

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