Shares of Party City Holdco Inc. (OTC:PRTYQ) fell by 84.64% in the past three months. Before having a look at the importance of debt, let's look at how much debt Party City Holdco has.

Party City Holdco Debt

According to the Party City Holdco's most recent financial statement as reported on November 8, 2022, total debt is at $1.78 billion, with $1.32 billion in long-term debt and $466.24 million in current debt. Adjusting for $29.81 million in cash-equivalents, the company has a net debt of $1.75 billion.

Let's define some of the terms we used in the paragraph above. Current debt is the portion of a company's debt which is due within 1 year, while long-term debt is the portion due in more than 1 year. Cash equivalents includes cash and any liquid securities with maturity periods of 90 days or less. Total debt equals current debt plus long-term debt minus cash equivalents.

Investors look at the debt-ratio to understand how much financial leverage a company has. Party City Holdco has $2.87 billion in total assets, therefore making the debt-ratio 0.62. 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 25% might be higher for one industry, but average for another.

Importance of 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.

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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This article was generated by Benzinga's automated content engine and reviewed by an editor.