Shares of American Airlines Group Inc. (NASDAQ: AAL) have risen 14.75% in the past three months. Before we understand the importance of debt, let’s take a look at the amount of debt of American Airlines Group.
The debt of the American Airlines group
Based on American Airlines Group financial statements as of July 23, 2020, long-term debt stands at $ 28.70 billion and current debt at $ 2.58 billion, for a total of 31.27 billions of dollars. Adjusted for $ 462.00 million in cash equivalents, the company’s net debt stands at $ 30.81 billion.
Investors look at the debt ratio to understand a company’s financial leverage. American Airlines Group has total assets of $ 64.54 billion, making the debt ratio of 0.48. Generally speaking, a debt ratio greater than 1 means that a large part of the debt is financed by assets. As the debt ratio rises, the risk of default increases if interest rates rise. Different industries have different tolerance thresholds for debt ratios. For example, a debt ratio of 25% may be higher for one industry, while it is normal for another.
Why debt matters
Debt is an important factor in a company’s capital structure and can help it achieve growth. Debt generally has a relatively lower cost of financing than equity, making it an attractive option for executives.
However, due to interest payment obligations, a company’s cash flow can be affected. Stock owners can keep excess profits, generated by debt capital, when companies use debt capital for their business operations.
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