1. Debt is not available to all industries. It is usually available only to companies that have steady business models, cash generating business structures, hard assets and other forms of collateral. This is because debt investors invest only in companies that can regularly pay interest and where there is collateral available.

2. There are different metrics to track debt affordability for a company. While things vary from business to business, some guidelines are below.

a. Debt to EBITDA ratio should not exceed 4

b. Total debt to total equity ratio should not exceed 1

c. Interest servicing ability as indicated by DSCR should exceed 1

3. Some businesses are viable only if they get debt. For example, some businesses such as power plants, roads, real estate projects are usually financially viable only if debt is available. In such businesses, careful planning of cash flows has to be done.

4. In other businesses, debt may not be a necessity. In these businesses, debt can be used to enhance returns for the shareholders. However, if debt servicing is not planned for appropriately, then it can lead to value destruction for shareholders.

 

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