Debt and leverage
Borrowing multiplies outcomes in both directions. The question is never whether a company has debt, but whether it can service it.
Leverage is the use of borrowed money. It raises returns when things go well and deepens losses when they do not, and it does both mechanically, without any judgement involved.
Why companies borrow at all
Because debt is usually cheaper than equity. A lender accepts a fixed return and gets paid first; a shareholder takes what is left. A company that can earn more on borrowed money than it pays in interest increases what is left for shareholders.
A large borrowing against stable, predictable cash flows can be safer than a small borrowing against volatile ones. The risk lives in the relationship between the obligation and the cash available to meet it, not in the size of the number.
The three things to look at
- Net debt. Total borrowings minus cash. A company with a billion of debt and a billion of cash owes nothing on net.
- Interest cover. Operating income divided by the interest bill. It answers: how many times over can the company pay what it owes this year?
- Maturity. When it is due. A company with debt due in eight years has options. The same company with the same debt due in eight months has a deadline.
Why refinancing is where trouble appears
Very few companies repay large borrowings. They replace them. That works until the moment the company needs to refinance at a higher interest rate, or into a market unwilling to lend — and those two conditions tend to arrive together, because both are caused by the same thing.
A downturn is survivable for a business with no fixed obligations; it can shrink, wait, and recover. The same downturn with debt maturing inside it is a different event, because the deadline does not move.