"No debt"

[Stockowner]

Why do so many talk about some companies having "no debt", when what they are talking about is a balance sheet with current liabilities and no long term debt. Isn't debt, debt?

It just seems a bit strange when looking at a balance sheet and somebody says "the company is debt-free", and you look at the balance sheet and you see there are numbers in "total liabilities".

Are these "current liabilities" just short term borrowings to make the business functioning normally? I have a bit trouble understanding why a company with, say, 10 or 20 billion in cash would have liabilities on their balance sheet (except of course, manipulating ROE numbers)...

Thoughts? :)

[joshuat]

An example: as a business, you usually order on account, net 30, meaning you place an order, receive the materials, and have to pay for them within 30 days. This would be listed under accounts payable on the balance sheet.

Second, you owe things like taxes quarterly, but you have to plan for paying the taxes. These get put on the books as a liability. Same with wages not yet paid, etc.

Third, look at what "liabilities" refers to. Shareholder's equity is often just listed under liability. In other words, at one point the company issued shares, and sold them to you. You have a stock certificate, they have your money. The certificate is an IOU, in effect, where in theory you can sell it back to the company and the company give you back your money. So, it's a liability. Of course since this is a free market they don't have to buy the stock back, but the liability is still there.


These are normal occurances in any business, and indeed, the first is a benefit - I wish that I didn't have to pay my bills for 30 days (I guess I can if I use a credit card and pay it off every month). This is a quite different situation than a business that has to borrow heavily to remain in business, or that has such a heavy debt load that the company struggles just to service the debt.

It's just a rough way to tell the financial health of a company. If a company currently has no debt and encounters a few rough quarters, they will be able to get a loan from the bank at favorable interest rates. If they are already loaded up with debt, they will either get very bad interest rates, or the bank may refuse to loan them any more money.

Not that debt, per se, is bad. If the company can invest the money at returns significantly greater than the interest rate (say ROE is 20%), it pays to be in debt. If they can't (say ROE is 3%), then being in debt is a danger signal.

[Stockowner]

Thanks! That last part was a bit of an eye-opener :)