Debt: When borrowing helps and when it sinks a company
When borrowing helps a company and when it sinks it: how to read debt-to-equity and interest cover, and what a falling interest cover warns you about.
Debt makes good years better and bad years deadly
| Measure | FY20 | FY21 | FY22 | FY23 | FY24 |
|---|---|---|---|---|---|
| Operating profitsales minus expenses, ₹ crore | 300 | 320 | 310 | 290 | 280 |
| Interestpaid on loans, ₹ crore | 30 | 55 | 95 | 140 | 175 |
| Interest coveroperating profit ÷ interest | 10.0× | 5.8× | 3.3× | 2.1× | 1.6× |
| Debtmoney borrowed, ₹ crore | 300 | 550 | 950 | 1,400 | 1,750 |
Borrowed money can grow a business faster than its owners could alone. But interest must be paid whether profit is up or down. When profit dips, a heavily borrowed company can’t pay its lenders.
What to look for
- Interest cover: operating profit ÷ interest. Above 5× is safe; below 2× is dangerous.
- Debt: is it growing faster than operating profit?
- Falling interest cover tells you lenders are taking a bigger slice every year.
Banks and NBFCs live on borrowed money, so judge them differently (Chapter 9).
Interest cover is 1.6×. What does that mean?
- Operating profit is only 1.6 times the interest bill, so a small dip could make it hard to pay
- The company can pay its interest 16 times over
- The company has 1.6 years of cash left
Show the answer
Operating profit is only 1.6 times the interest bill, so a small dip could make it hard to pay. ₹280 crore of operating profit against ₹175 crore of interest. A 40% fall in profit and the company can’t cover its interest at all.
What the numbers showed
In FY24 cover fell to 1.6×. Five years earlier it was 10×. Debt grew almost six times while operating profit went nowhere.
Banks and NBFCs live on borrowed money, so judge them differently (Chapter 9).
Practise Debt, free
Reading about it is step one. In MarketSeekho you look at a company’s numbers, make a call, say why, and get graded on your reasoning, not luck.
Common questions
What is Debt?
Borrowed money can grow a business faster than its owners could alone. But interest must be paid whether profit is up or down. When profit dips, a heavily borrowed company can’t pay its lenders.
What should I look for in debt?
Interest cover: operating profit ÷ interest. Above 5× is safe; below 2× is dangerous. Debt: is it growing faster than operating profit? Falling interest cover tells you lenders are taking a bigger slice every year.
Interest cover is 1.6×. What does that mean?
Operating profit is only 1.6 times the interest bill, so a small dip could make it hard to pay. ₹280 crore of operating profit against ₹175 crore of interest. A 40% fall in profit and the company can’t cover its interest at all.
How can I practise debt for free?
MarketSeekho has a free four-page chapter on Debt (learn, answer a question, spot it in a company’s numbers, then make a call) and an unlimited Better business practice game graded on your reasoning. No sign-up or money needed.