Broadcom Inc. shares AVGO up 15.20% over the past three months. Before we look at the importance of debt, let’s look at how much debt Broadcom has.

Broadcom Debt

Based on Broadcom’s financial statements dated March 8, 2023, long-term debt is $38.17 billion and current debt is $1.11 billion, for total debt of $39.28 billion. Adjusted for $12.65 billion in cash, the company’s net debt is $26.64 billion.

Let’s define some of the terms we used in the paragraph above. Current Debt is that portion of a company’s debt that falls due within one year, during Long-term liabilities is the portion due in more than 1 year. cash equivalents includes cash and all liquid securities with maturities of 90 days or less. total debt equals current liabilities plus non-current liabilities minus cash equivalents.

To understand a company’s level of financial leverage, shareholders look at the leverage ratio. Considering Broadcom’s total assets of $72.98 billion, the debt ratio is 0.54. As a rule of thumb, a debt ratio greater than 1 indicates that a significant portion of the debt is funded by assets. A higher leverage ratio can also mean that the company faces default risk if interest rates rise. However, leverage ratios vary widely across different industries. A debt ratio of 25% may be higher for one industry but average for another.

Why Debt Matters

In addition to equity, borrowed capital is an important factor in the capital structure of a company and contributes to its growth. The lower cost of financing compared to equity makes it an attractive option for executives trying to raise capital.

However, interest payment obligations may adversely affect the Company’s cash flow. Financial leverage also allows companies to use additional capital to operate the business, allowing equity investors to retain excess profits generated by the leverage.

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