Shares of Johnson & Johnson Inc. JNJ moved higher by 4.83% in the past three months. Before having a look at the importance of debt, let’s look at how much debt Johnson & Johnson has.
Johnson & Johnson’s Debt
Based on Johnson & Johnson’s balance sheet as of October 27, 2022, long-term debt is at $27.60 billion and current debt is at $4.42 billion, amounting to $32.03 billion in total debt. Adjusted for $11.36 billion in cash-equivalents, the company’s net debt is at $20.67 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 includes 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.
Investors look at the debt-ratio to understand how much financial leverage a company has. Johnson & Johnson has $175.12 billion in total assets, therefore making the debt-ratio 0.18. 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, but average for another.
Why Debt Is Important
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. 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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