Benzinga | Aug 13, 2020 09:21AM EDT

A Look Into KAR Auction Services's Debt

Over the past three months, shares of KAR Auction Services Inc. (NYSE:KAR) rose by 50.78%. Before having a look at the importance of debt, let's look at how much debt KAR Auction Services has.

KAR Auction Services's Debt

According to the KAR Auction Services's most recent financial statement as reported on August 5, 2020, total debt is at $2.63 billion, with $1.86 billion in long-term debt and $769.90 million in current debt. Adjusting for $968.50 million in cash-equivalents, the company has a net debt of $1.66 billion.

Investors look at the debt-ratio to understand how much financial leverage a company has. KAR Auction Services has $6.49 billion in total assets, therefore making the debt-ratio 0.4. Generally speaking, a debt-ratio more than 1 means that a large portion of debt is funded by assets. As the debt-ratio increases, so the does the risk of defaulting on loans, if interest rates were to increase. Different industries have different thresholds of tolerance for debt-ratios. For example, a debt ratio of 40% might be higher for one industry, whereas normal for another.

Why Investors Look At Debt?

Debt is an important factor in the capital structure of a company, and can help it attain growth. Debt usually has a relatively lower financing cost than equity, which makes it an attractive option for executives.

Interest-payment obligations can impact 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.