Over the past three months, shares of Group 1 Automotive (NYSE: GPI) increased by 57.98%. Before we understand the importance of debt, let us look at how much debt Group 1 Automotive has.
Group 1 Automotive’s Debt
According to the Group 1 Automotive’s most recent balance sheet as reported on August 3, 2020, total debt is at $2.47 billion, with $1.36 billion in long-term debt and $1.11 billion in current debt. Adjusting for $72.70 million in cash-equivalents, the company has a net debt of $2.40 billion.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Group 1 Automotive’s $4.86 billion in total assets, the debt-ratio is at 0.51. As a rule of thumb, a debt-ratio more than one 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 40% might be higher for one industry and average for another.
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.
Interest-payment obligations can impact 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.
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