Shares of Sorrento Therapeutics Inc. (NASDAQ: SRNE) increased by 112.52% in the past three months. Before having a look at the importance of debt, let’s look at how much debt Sorrento Therapeutics has.
Sorrento Therapeutics’s Debt
According to the Sorrento Therapeutics’s most recent financial statement as reported on August 4, 2020, total debt is at $166.18 million, with $147.03 million in long-term debt and $19.15 million in current debt. Adjusting for $24.39 million in cash-equivalents, the company has a net debt of $141.79 million.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Sorrento Therapeutics’s $533.07 million in total assets, the debt-ratio is at 0.31. 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. A debt ratio of 35% might be higher for one industry, whereas average for another.
Why Debt Is Important
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.
However, interest-payment obligations can have an adverse impact on 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.
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