Shares of Starbucks Inc. (NASDAQ:SBUX) increased by 9.54% in the past three months. Before having a look at the importance of debt, let's look at how much debt Starbucks has.

Starbucks's Debt

According to the Starbucks’s most recent financial statement as reported on July 28, 2020, total debt is at $16.83 billion, with $14.65 billion in long-term debt and $2.19 billion in current debt. Adjusting for $3.97 billion in cash-equivalents, the company has a net debt of $12.87 billion.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Starbucks’s $29.14 billion in total assets, the debt-ratio is at 0.58. 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

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.