Actions of Canadian solar (NASDAQ: CSIQ) has risen 48.85% in the past three months. Before we understand the importance of debt, let’s take a look at the amount of debt that Canadian Solar owes.
Canadian Solar’s debt
According to Canadian Solar’s financial statements as of April 28, 2020, long-term debt stands at $ 696.05 million and current debt at $ 1.76 billion, for a total debt of $ 2.46 billion. of dollars. Adjusted for $ 668.77 million in cash equivalents, the company’s net debt stands at $ 1.79 billion.
To understand a company’s degree of financial leverage, investors look at the debt ratio. Considering Canadian Solar’s total assets of $ 5.47 billion, the debt ratio is 0.45. Generally speaking, a debt ratio greater than one 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. A debt ratio of 40% may be higher for one industry and normal for another.
Significance of debt
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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