Over the past three months, shares of Procter & Gamble (NYSE:PG) moved lower by 4.46%. Before having a look at the importance of debt, let us look at how much debt Procter & Gamble has.

Procter & Gamble's Debt

Based on Procter & Gamble's financial statement as of October 20, 2020, long-term debt is at $23.95 billion and current debt is at $7.71 billion, amounting to $31.66 billion in total debt. Adjusted for $13.39 billion in cash-equivalents, the company's net debt is at $18.26 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 Procter & Gamble's $119.90 billion in total assets, the debt-ratio is at 0.26. 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 40% might be higher for one industry and normal for another.

Why Investors Look At 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.

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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