Over the past three months, shares of LPN (NYSE: IAA) fell 26.06%. Before we look at the size of debt, let’s look at the amount of IAA debt.
According to the IAA’s latest financial statement released on November 2, 2021, total debt stands at $1.14 billion, with $1.13 billion in long-term debt and $8.10 million in debt. current. After adjusting for $286.10 million in cash equivalents, the company has net debt of $850.00 million.
Let’s define some of the terms we used in the paragraph above. Current debt is the portion of a company’s debt that is due within one year, while long-term debt is the portion due in more than one year. Cash equivalents include cash and all liquid securities with maturities of 90 days or less. Total debt equals current debt plus long-term debt minus cash equivalents.
Shareholders look at the debt ratio to understand a company’s financial leverage. IAA has total assets of $2.81 billion, bringing the debt ratio to 0.4. Generally speaking, a debt ratio greater than one means that a large part of the debt is financed by assets. As the debt-to-equity ratio increases, the risk of loan default also increases if interest rates were to rise. Different industries have different tolerance thresholds for debt ratios. A debt ratio of 35% may be higher for one industry and average for another.
Why shareholders look at debt?
Besides equity, debt is an important factor in a company’s capital structure and contributes to its growth. Due to its lower cost of funding than equity, it becomes an attractive option for executives trying to raise capital.
However, interest payment obligations can have a negative impact on the company’s cash flow. Equity holders can retain excess profits, generated by debt capital, when companies use debt capital for their business operations.
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