Shares of 3M Inc. MMM rose by 9.85% in the past three months. Before having a look at the importance of debt, let's look at how much debt 3M has.

3M's Debt

Based on 3M’s balance sheet as of April 28, 2020, long-term debt is at $19.25 billion and current debt is at $3.25 billion, amounting to $22.50 billion in total debt. Adjusted for $4.25 billion in cash-equivalents, the company's net debt is at $18.24 billion.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering 3M’s $46.21 billion in total assets, the debt-ratio is at 0.49. As a rule of thumb, a debt-ratio more than 1 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 25% might be higher for one industry, whereas average for another.

Why Shareholders Look At Debt?

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. Equity owners can keep excess profit, generated from the debt capital, when companies use the debt capital for its business operations.