6.28Finding companies with manageable debt
1What is it?
Check D/E (below 1 for most businesses), the interest coverage ratio (EBIT ÷ interest, ideally above 3–5×), and whether debt is rising faster than profits.
2Why does it exist?
Companies with low debt survive downturns; highly indebted ones may need to sell assets or dilute shareholders.
3Calculation
Interest coverage = EBIT ÷ Interest expense
- EBIT ₹1,000 cr; interest ₹100 cr → 10×.
Profits cover interest 10 times: comfortable.
4Quick revision
- D/E < 1 (non-financials).
- Interest coverage > 3–5×.
- Debt shouldn’t outgrow profits.
5Knowledge check
Q1. EBIT ₹300 cr, interest ₹150 cr. Coverage?Show answer
2×, which is weak.
Q2. Why is debt dangerous in recessions?Show answer
Interest is fixed while profits fall.
Q3. Is a debt-free company always better?Show answer
Not always, but it is safer.
See it live on MojoStox