Shares of Ford Motor Inc. F increased by 39.64% in the past three months. Before having a look at the importance of debt, let's look at how much debt Ford Motor has.

Ford Motor's Debt

According to Ford Motor’s most recent financial statement as reported on July 31, 2020, total debt is at $175.23 billion, with $119.89 billion in long-term debt and $55.34 billion in current debt. Adjusting for $30.99 billion in cash-equivalents, the company has a net debt of $144.24 billion.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Ford Motor’s $269.37 billion in total assets, the debt-ratio is at 0.65. As a rule of thumb, a debt-ratio more than 1 indicates that a considerable portion of debt is funded by assets. A higher debt-ratio can also imply that the company might be putting itself at risk for default if interest rates were to increase. However, debt-ratios vary widely across different industries. A debt ratio of 35% might be higher for one industry, whereas average for another.

Importance of Debt

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. 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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